ST.   LOUIS  EXHIBIT 


LIBRARY 

OF  THE 

UNIVERSITY  OF  CALIFORNIA. 


GIFST  OF 


Class 

niy\ 

\ 


' 

0    * 


INTRODUCTION  TO   PUBLIC  FINANCE 


INTRODUCTION 


TO 


PUBLIC    FINANCE 


BY 


CARL  C.   PLEHN,  PH.D. 

ASSOCIATE  PROFESSOR  IN  THE  UNIVERSITY  OF 
CALIFORNIA 


"Je  ri*  impose  new;  je  ne propose  mSme  rien;  f  expose" 

DUNOYER 


SECOND  EDITION.      KEVISED  AND  ENLARGED 


THE    MACMILLAN   COMPANY 

LONDON  :   MACMILLAN  &  CO.,  LTD. 
1902 

All  rights  reserved 


COPYRIGHT,  1896, 
BY  THE  MACMILLAN  COMPANY. 


Set  up  and  electrotyped  August,  1896.     Reprinted  August, 
1897.     Second  edition,  revised.  May,  1900   ;  July,  1902. 


XorhiootJ 
J.  S.  Gushing  &  Co.  -  Berwick  &  Smith 
Norwood  Mass.  U.S.A. 


PREFACE 

THIS  Introduction  to  Public  Finance  is  intended  to  be 
an  elementary  text-book.  It  contains  a  simple  outline 
of  those  things  which  are  necessary  to  prepare  the  stu- 
dent for  independent  research ;  a  brief  discussion  of  the 
leading  principles  that  are  generally  accepted ;  a  state- 
ment of  unsettled  principles  with  the  grounds  for  con- 
troversy; and  sufficient  references  to  easily  accessible 
works  and  sources  to  enable  the  student  to  form  some 
opinion  for  himself.  The  references  that  are  given  are 
not  so  much  for  the  purpose  of  sustaining  the  author's 
statements,  which  any  advanced  student  or  teacher  can 
easily  trace  to  their  sources,  as  to  enable  the  beginner  to 
add  to  his  information  on  points  that  are  of  necessity 
briefly  treated  here. 

Both  the  American  and  the  English  systems  of  taxa- 
tion are  badly  in  need  of  reform.  Public  opinion  is 
gradually  awakening  to  this  need.  Financial  questions 
are  widely  discussed.  There  can  be  no  doubt  that  the 
most  pressing  reforms  of  the  close  of  the  nineteenth 
century  are  tax  reforms.  The  rapid  extension  of  govern- 
mental functions  —  the  invasion  by  the  government  of 
fields  of  activity  that  lie  near  to  the  welfare  of  the  people 
—  has  given  rise  to  great  interest  in  the  financial  side  of 

v 

130278 


vi  PREFACE 

these  activities.    It  is  hoped  that  this  work  may  be  help- 
ful in  the  accomplishment  of  these  needed  reforms. 

The  Introduction  to  Public  Finance  can  be  intelli- 
gently studied  by  any  person  already  familiar  with  the 
general  principles  of  Political  Economy.  Technical 
details  and  wearisome  tables  of  statistics  have  been 
avoided  wherever  ^possible.  Abundant  references  to  sta- 
tistical compilations  are,  however,  given,  so  that  such 
matters  can  be  readily  looked  up  if  wanted.  The  coun- 
tries whose  financial  systems  have  been  chiefly  used  to 
illustrate  principles  are  England,  Germany,  France,  and 
the  United  States ;  other  countries  have  been  drawn 
upon  only  for  particularly  pertinent  examples.  A  brief 
but  complete  history  of  the  financial  practices  of  the 
four  countries  named  has  been  given.  The  countries 
most  extensively  studied  are  England  and  the  United 
States.  Although  the  book  has  been  written  from  the 
point  of  view  of  an  American,  the  author  ventures  the 
hope  that  it  may  not  prove  the  less  useful  to  English 
students. 

CARL  C.    PLEHN. 

BERKELEY,  CAL.,  August,  1896. 


TABLE   OF  CONTENTS 


INTRODUCTION 

SECTION  1.  Definition,  scientific  character,  and  relations  of  Public 
Finance.  SEC.  2.  History  of  the  science.  SEC.  3.  Method  and 
subdivisions  of  the  subject.  SEC.  4.  Desirability  and  feasibility 
of  a  single  method  of  classification  throughout  the  whole  sub- 
ject. Page  1 

PART   I 

PUBLIC  EXPENDITURE 
CHAPTER  I 

THE  NATURE  OP  THE  STATE  ;  ITS  FUNCTIONS  AND  THEIR 
CLASSIFICATION 

SECTION  1.  Political  science  sets  no  definite  limits  to  the  extension 
of  State  functions.  SEC.  2.  Public  Finance  finds  a  limit  in  the 
revenue-yielding  strength  of  the  State.  SEC.  3.  Public  expendi- 
ture in  early  times.  ,SEC.  4.  Public  expenditure  in  Greece  and 
Rome.  SEC.  5.  Feudal  expenditure  and  the  beginnings  of  mod- 
ern. SEC.  6.  Classification  of  expenditure.  Page  17 

CHAPTER  II 
EXPENDITURE  EXCLUSIVELY  FOR  THE  COMMON  BENEFIT 

SECTION  1.  Expenditure  for  general  administration.  SEC.  2.  Ex- 
penditure for  the  legislative  department.  SEC.  3.  Expendi- 
ture for  public  buildings.  SEC.  4.  Expenditure  for  defence. 
SEC.  5.  Expenditure  for  means  of  transportation.  SEC.  6.  Ex- 
penditure for  education.  SEC.  7.  Assistance  of  private  industry 
and  commerce.  Page  33 

vii 


viii  CONTENTS 

CHAPTER  III 
EXPENDITURE  FOR  THE  BENEFIT  OF  INDIVIDUALS 

SECTION  1.  Expenditure  for  charities.  SEC.  2.  Pensions.  SEC.  3. 
Bounties  and  "protection."  SEC.  4.  Expenditure  for  the  ad- 
ministration of  justice.  SEC.  5.  "Betterment"  of  property. 
SEC.  6.  Expenditure  in  public  industries.  Page  53 

PAKT   II 
PUBLIC  REVENUES 

CHAPTER  I 
THE  CHARACTER  AND  CLASSIFICATION  OF  PUBLIC  REVENUES 

SECTION  1.  Early  forms  of  revenue.  SEC.  2.  The  growth  of  con- 
stitutionalism results  in  uniformity  of  the  revenue  systems  of 
the  different  countries.  SEC.  3.  Different  States  find  the  same 
justification  of  taxation.  SEC.  4.  Compulsion  is  universal. 
SEC.  5.  Classification  of  revenues,  definitions  of  fees,  taxes, 
and  prices.  SECS.  6  and  7.  Further  considerations  on  classifi- 
cation. Page  69 

CHAPTER  II 
THE  CLASSIFICATION  OF  TAXES  AND  FEES;  DEFINITIONS 

SECTION  1.  The  measure  of  taxation  distinguished  from  the  justi- 
fication ;  benefit  theory  and  faculty  theory.  SEC.  2.  Difficulties 
in  the  classification  of  taxes.  SEC.  3.  Direct  and  indirect  taxes. 
SEC.  4.  Taxes  on  persons,  property,  and  income.  SEC.  5.  Other 
classifications  of  taxes.  SEC.  6.  Classification  of  fees.  SEC.  7. 
Economic  revenues.  SEC.  8.  Definitions  of  various  terms  used. 
Page  83 

CHAPTER  III 
THE  TAX  SYSTEM 

SECTION  1.  All  nations  use  many  different  taxes ;  no  single  tax 
feasible.  SEC.  2.  What,  in  the  opinion  of  nations,  constitutes 


CONTENTS  ix 

the  ideal  of  correct  or  just  taxation.  The  benefit  theory ;  the 
legal  theory  in  the  United  States.  SEC.  3.  The  faculty  theory  ; 
what  constitutes  faculty.  SEC.  4.  Other  theories  and  progres- 
sion. Page  105 

CHAPTER   IV 

THE  DEVELOPMENT  OF  TAXATION  BEFORE  THE  INDUSTRIAL 
REVOLUTION 

SECTION  1.  Feudal  dues  commuted,  and  voluntary  contributions  be- 
come taxes.  SEC.  2.  History  of  taxation  in  France.  SEC.  3. 
History  of  Crown  taxation  in  England.  SEC.  4.  History  of  local 
taxation  in  England.  SEC.  5.  Colonial  taxation  in  America. 
Page  123 

CHAPTER  V 

THE  DEVELOPMENT  OF  TAX  SYSTEMS  SINCE  THE  INDUSTRIAL 
REVOLUTION 

SECTION  1.  The  effect  of  the  industrial  and  political  revolution. 
SEC.  2.  General  outline.  SEC.  3.  Development  of  taxation  in 
Prussia.  SEC.  4.1  In  France.  SEC.  5.  In  England.  SEC.  6.  In 
America.  Page  144 

CHAPTER  VI 

EXCISES 

SECTION  1.  Comparison  of  excises  and  customs  ;  and  direct  cod- 
sumption  taxes.  SEC.  2.  Purposes  and  principles  of  the  ex- 
cises. SEC.  3.  Method  of  assessment.  SEC.  4.  Typical  excises. 
SEC.  5.  Proper  field  for  excises.  Page  169 

CHAPTER   VII 
CUSTOMS  DUTIES 

SECTIONS  1  and  2.  Customs  duties  defined.  SECS.  3  and  4.  The  pur- 
poses of  customs  duties,  both  fiscal  and  political.  Protective 
and  revenue  tariffs.  SEC.  5.  The  protective  principle  widely 
applied.  SEC.  6.  The  tax  character  of  protective  duties.  SEC.  7. 
Customs  duties  as  a  source  of  revenue.  SEC.  8.  History  of  cus- 
toms duties  in  England.  SEC.  9.  The  German  customs  union 
and  the  Imperial  tariffs.  SEC.  10.  History  of  the  French  tariff. 
SEC.  11,  Tariff  history  of  the  United  States.  Page  182 


X  CONTENTS 

CHAPTER  VIII 

PROPERTY  TAXES 

PART  1.     The  General  Property  Tax 

SECTION  1.  Theory  of  general  property  tax  and  the  objections  to  it 
based  upon  the  experience  of  the  United  States.  SEC.  2.  Sci- 
entific judgment  of  the  general  property  tax.  Page  208 

PART  2.,   Special  Property  Taxes 

SEC.  3.  The  land  tax.  SEC.  4.  Building  tax.  SEC.  5.  Taxation  of 
capital.  SEC.  6.  Inheritance  tax.  Page  219 

CHAPTER   IX 
PERSONAL  TAXES 

SECTION  1.  Poll  tax.  SEC.  2.  Theory  of  the  income  tax.  SEC.  3. 
Place  of  the  income  tax  in  the  tax  system.  SEC.  4.  Prussia 
income  tax.  SEC.  5.  The  British  property  and  income  tax. 
SEC.  6.  Income  taxes  in  the  United  States.  Page  231 

CHAPTER   X 
THE  INCIDENCE  OF  TAXATION 

SECTION  1.  Incidence  depends  upon  the  system  ;  meaning  of  shift- 
ing and  incidence.  SEC.  2.  Shifting  may  or  may  not  defeat  the 
purpose  of  the  tax.  SEC.  3.  Shifting  adds  to  the  burden  of 
taxation.  SEC.  4.  Shifting  cannot  take  place  when  taxes  are 
universal  and  equal.  SEC.  5.  Incidence  of  excises  and  cus- 
toms. SEC.  6.  Incidence  of  the  general  property  tax.  SEC.  7. 
Incidence  of  special  property  taxes  and  of  personal  taxes. 
Page  248 

CHAPTER  IX 
FEES  AND  INDUSTRIAL  EARNINGS 

SECTION  1.  Connection  between  fees  and  industrial  earnings; 
development  of  fees  into  taxes.  SEC.  2.  Judicial  and  legal 
fees.  SEC.  3.  Administrative  fees.  SEC.  4.  Special  assess- 
ments. SEC.  5.  Postal  fees.  SEC.  6.  Revenues  from  public 
property.  SEC.  7.  Revenue  from  public  industries.  Page  259 


CONTENTS  xi 

PAET   III 

PUBLIC   INDEBTEDNESS 

CHAPTER  I 
THE  GROWTH  AND  NATURE  OF  PUBLIC  CREDIT 

SECTION  1.  Size  of  public  debts.  SECS.  2  and  3.  The  nature  of 
credit.  SEC.  4.  Wherein  public  credit  differs  from  private. 
SEC.  5.  Economic  effects  of  public  borrowing.  SEC.  6.  Foreign 
and  domestic  loans.  Page  278 

CHAPTER  II 
FORMS  OF  PUBLIC  DEBTS 

SECTION  1.  Funded  and  floating  debts.  SEC.  2.  Forced  and  con- 
tractual loans.  SEC.  3.  Classification  of  debts.  SEC.  4.  "Per- 
petual "  bonds  and  redeemable  bonds.  SEC.  5.  Terminable 
annuities.  SEC.  6.  Lottery  loans.  SEC.  7.  The  rate  of  in- 
terest. SEC.  8.  Debts  of  the  treasury.  SEC.  9.  Productive 
loans.  Page  293 

CHAPTER  III 

NEGOTIATION,  PAYMENT  OF  INTEREST,  CONVERSION,  AND  REDEMP- 
TION OF  DEBTS 

SECTION  1.  Two  chief  methods  of  negotiating  public  loans.  SEC.  2. 
Place  of  payment  of  interest,  and  other  minor  considerations. 
SEC.  3.  Conversion  of  the  debt.  SEC.  4.  Debt  payment  and 
the  sinking  fund  in  England.  SEC.  5.  Debt  payment  and  the 
sinking  fund  in  America.  SEC.  6.  Summary.  Page  310 


Xll  CONTENTS 

PART   IV 

FINANCIAL  ADMINISTRATION 
CHAPTER  I 

THE  BUDGET  ;  ADMINISTRATION  OP  EXPENDITURE  ;   CONTROL  AND 

AUDIT 

SECTION  1.  Importance  of  sound  methods  of  administration. 
SEC.  2.  History  of  fiscal  administration.  SEC.  3.  The  budget 
in  England,  and  appropriations  in  the  United  States.  SEC.  4. 
English  control  and  audit.  SEC.  5.  Control  and  audit  in  the 
United  States.  Page  325 

CHAPTER  II 

COLLECTION  OF  THE  REVENUES  ;  CUSTODY  OF  THE  FUNDS  ;  AND 
THE  PUBLIC  ACCOUNTS 

SECTION  1.  Early  methods  of  collecting  revenues.  SEC.  2.  Collec- 
tion of  customs  duties  and  excises.  SEC.  3.  Assessment  of 
direct  taxes,  "declaration,"  and  equalization.  SEC.  4.  Con- 
venience of  the  contributor  must  be  consulted  in  the  collection 
of  taxes.  SEC.  5.  Transfer  of  the  public  funds  and  custody  of 
the  public  moneys.  SEC.  6.  Public  accounts  in  England  and 
America.  SEC.  7.  "  Funds  of  account. "  Page  340 

CHAPTER  III 

FINANCIAL  ADMINISTRATION  OF  WAR  ;  ILLUSTRATED  BY  THE  EXPE- 
RIENCE OF  THE  UNITED  STATES  IN  THE  WAR  WITH  SPAIN 

SECTION  1.  u  Extra-ordinary  "  expenses.  SEC.  2.  Increased  rates 
for  old  taxes.  SEC.  3.  New  taxes.  SEC.  4.  Difficulties  in  the 
use  of  credit.  SEC.  5.  Situation  of  the  United  States  Treasury 
at  the  outbreak  of  war.  SEC.  6.  The  tariff  could  not  be 
changed.  SEC.  7.  Main  resource  internal  taxes.  SEC.  8.  Yield 
of  new  taxes.  SEC.  9.  Amount  borrowed.  SEC.  10.  Preserva- 
tion of  credit.  SEC.  11.  A  popular  loan.  Page  354 

BRIEF  BIBLIOGRAPHY  FOR  ADVANCED  STUDENTS.    Page  375 
INDEX.    Page  377 


INTRODUCTION  TO    PUBLIC  FINANCE 


INTRODUCTION  TO  PUBLIC  FINANCE 


INTRODUCTION 

SECTION  1.  Public  Finance  deals  with  the  way 
in  which  the  State  acquires  and  expends  its  means 
of  subsistence.  It  stands  in  somewhat  the  same 
relation  to  the  State  that  Political  Economy  stands 
to  the  individual.  If  Economics  may  be  defined 
as  the  science  which  deals  with  the  activity  of 
the  practical  reason  in  acquiring  and  applying  those 
things  that  are  provided  in  comparatively  limited 
quantities,  for  the  satisfaction  of  the  external  and 
temporal  wants  of  man,  then,  adapting  our  defi- 
nition to  somewhat  the  same  terminology,  Public 
Finance  may  be  defined  as  the  science  which  deals 
with  the  activity  of  the  statesman  in 
obtaining  and  applying  the  material 
means  necessary  for  fulfilling  the  proper  functions 
of  the  State. 

Public  Finance  is  properly  called  a  science,  be- 
cause, (1)  it  deals  with  a  definite  and  pro  erl 
limited  field  of  human  knowledge ;   (2)   called  a  sti- 
it    admits    of    an    orderly   arrangement 
of    its    facts    and    principles,    and    contains    many 

B  1 


2  INTRODUCTION  TO  PUBLIC  FINANCE 

laws  of  general  progress  belonging  exclusively  to 
its  own  field;  (3)  it  admits  of  the  application  of 
scientific  methods  of  investigation;  (4)  it  foresees 
as  well  as  explains  a  certain  class  of  phenomena; 
(5)  it  is  generally,  if  not  universally,  so  regarded. 
A  dependent  It  is?  however,  a  secondary  or  dependent 
science.  science.  It  is  closely  related  to  two 

other  sciences,  upon  which  it  properly  depends. 
These  are  Political  Economy  and  Political  Science. 
While,  on  the  one  hand,  it  draws  largely  upon  the 
conclusions  of  these  two  sciences  for  its  hypotheses, 
yet  on  the  other  it  contributes  much  to  them. 
Most  of  the  prominent  German  writers  on  the 
subject  regard  Public  Finance  as  a  corporate  part 
of  Political  Economy.  It  is  properly  so  regarded, 
because  the  activities  of  the  State  that  belong 
to  this  field  are  of  such  a  nature  as  to  consume 
wealth,  produce  wealth,  and  to  interfere  with  the 
distribution  of  wealth.  From  Political  Science  we 
shall  have  to  borrow  many  conclusions  as  to  the 
nature  of  the  State,  and  as  to  the  functions  of 
government.  A  determination  of  what  the  proper 
functions  of  the  State  may  be  is  no  part  of  our 
subject,  but  belongs  wholly  to  Political  Science.1 
In  general  it  has  been  found  best  to  assume 
that  the  functions  now  actually  performed  by  the 
States  are  proper,  provided  they  are  not  clearly 

1  For  discussions  of  that  part  of  the  subject  the  reader  is  referred 
to  Bluntschli's  Theory  of  the  State,  Wilson's  State,  Hoffman's 
Sphere  of  the  State,  and  Crane  and  Moses'  Politics. 


INTR  OD  UC  TION  3 

contrary  to  some  generally  accepted  principles  of 
Political  Science.  We  are  thus  relieved  of  the 
burden,  assumed  by  many  writers  on  the  subject, 
of  attacking  or  defending  the  actions  of  different 
governments  in  matters  as  to  the  propriety  of 
which  there  is  some  question :  for  example,  the 
propriety  of  the  continuance  or  assumption  of 
State  ownership  of  railroads,  or  the  State  monop- 
oly of  tobacco.  All  such  matters  will  be  treated 
purely  from  the  fiscal  point  of  view. 

Information  concerning  the  facts  with  which  the 
science  of  Public  Finance  deals  can,  in  most  in- 
stances, be  definitely  ascertained,  and 

J.  /IB  Aft  Oj 

the  conclusions  drawn  have  often  a  Public  Fi- 
sharpness  and  distinctness  lacking  in  T( 
many  other  parts  of  Political  Economy  and  Po- 
litical Science.  There  is,  consequently,  the  tempta- 
tion to  create  the  corresponding  Art  of  Public 
Finance.  For  when  any  science  becomes  at  all 
"exact,"  it  is  easy  and  often  desirable  to  point  out 
possible  direct  applications  of  the  truths  learned. 
But  although  it  is  of  the  utmost  importance  that 
statesmen  should  be  guided  in  their  actions  by  cor- 
rect principles,  it  is  in  no  sense  the  duty  of  the 
scientist,  as  such,  to  make  the  application  of  the 
laws  he  may  learn.  Scientific  investigation  should 
precede,  and  ever  remain  independent  of,  any  pos- 
sible use  of  the  truths  discovered.  In  no  other 
way  than  by  the  search  for  truth  for  its  own  sake, 
can  we  obtain  absolute  clearness  of  view. 


4  INTRODUCTION  TO  PUBLIC  FINANCE 

SEC.  2.    Public  Finance,  as  a  science,  is  older  than 
Political  Economy.    Indeed,  it  is  not  incorrect  to  say 


Older  than  *  WaS   ^6    f°rerunner   of    k°tn  the 

Political  sciences  to  which  it  is  now  tributary. 
Economy.  For  the  writingg  of  the  Cameralists  dealt 

more  fully  with  this  part  of  the  field  of  Political 
Economy  than  with  any  other.  Public  Finance  as 
an  art,  and  as  the  subject  of  more  or  less  conscious 
study,  necessarily  arose  as  soon  as  there  was  a  dis- 
tinct separation  between  the  income  of  the  Gov- 
ernment, or  the  State  as  such,  -and  the  income  of 
the  Prince  :  —  that  is,  as  soon  as  any  direct  levy  was 
made  upon  the  wealth  of  the  citizens,  or  any  prop- 
erty administered,  to  secure  a  revenue  for  an  ac- 
knowledged public  purpose  broader  than  the  mere 
support  of  the  Prince's  household.  The  necessity 
for  officials  properly  trained  to  administer  the  vast 
princely  and  public  revenues  that  flowed  into  the 
public  coffers  led  to  extensive  studies  in  just  this 
line  ;  and  then  the  investigation  into  the  origin  and 
causes  of  the  wealth  of  nations,  as  the  foundation 
and  source  of  public  revenues,  was  the  step  which 
led  to  the  birth  of  the  greater  science. 

The  writers  on  the  Cameralistic  science  (which, 
because  it  at  first  embraced  but  little  more  than 
the  matter  now  included  in  Public  Finance,  may 
be  properly  claimed  as  our  science  under  another 
name)  were  stronger  in  Germany  than  elsewhere.1 

1  For  an  account  of  them  see  Roscher,  Geschichte  der  National 
Oekonomie  in  Deutschland. 


INTRODUCTION  5 

On   this    account    the    science    has    always   had   a 
stronger   hold   there   than  in   France  or   England. 
In  those  countries  the  lead  of  the  Phys-   only  parts  of 
iocratic    doctrine,    the    powerful    influ-  the  subject 
ence    of    Adam    Smith,   and,  after    his  English 


time,  the  intensity  and  rapidity  of  in- 
dtistrial  development,  directed  the  attention  of  stu- 
dents in  such  fields  to  the  more  general  and  more 
absorbing  questions.  Although  Adam  Smith  him- 
self devotes  one  book  to  the  discussion  of  finance, 
and  other  writers  of  note  give  it  passing  attention,  it 
was  extremely  slow  in  obtaining  independent  recog- 
nition. The  predominance  in  both  England  and 
France  of  a  theory  of  State  which  minimised  the 
importance  of  government  action  may  in  part  ac- 
count for  this  neglect.  The  one  part  of  the  sub- 
ject that  did  receive  attention  —  namely,  taxation  — 
dealt  with  an  activity  that  was  admittedly  neces- 
sary. But  other  fields,  like  that  of  expenditure, 
were  comparatively  neglected.  The  same  blind- 
ness which  led  English  economists  to  underrate  the 
importance  of  a  study  of  consumption,  except  so 
far  as  it  led  to  new  production,  prevented  them 
from  seeing  anything  worth  studying  in  State  ex- 
penditure beyond,  possibly,  its  effect  on  new  rev- 
enues. Hence  it  is  that  while  Germany  piled 
treatise  on  treatise,  all  deep,  scholarly,  and  broad, 
covering  the  whole  subject  of  Public  Finance,  we 
have  had  to  wait  until  1892  for  a  systematic  treat- 
ment of  the  whole  field  in  the  English  language, 


6  INTRODUCTION  TO  PUBLIC  FINANCE 

and  we  still  await  such  a  one  in  French.1  It 
must  not  be  understood  that  portions  of  the  sub- 
ject were  not  investigated.  There  are,  on  the 
contrary,  many  important  works  on  the  various 
parts  of  the  science.  But  what  was  entirely  lack- 
ing until  the  appearance  of  Bastable's  Public  Fi- 
nance, in  1892,  was  an  attempt  to  systematise  the 
whole  subject. 

Financial  problems  are  becoming  more  important, 
because  the  functions  of  government  which  depend 
The  recent  on  ^em  ^ave  grown  in  importance  and 
growth  of  number.  Our  industrial,  commercial, 
and  social  organisation  has  become  more 
and  more  complex,  and  it  hence  requires  better  and 
more  effective  governmental  organisation  to  keep  it 
running  smoothly.  The  more  important  it  becomes 
to  perfect  our  governmental  organisation,  the  more 
do  questions  affecting  the  supply  and  application  of 
material  support  rise  into  prominence.  Whether 
we  regard  the  constant  expansion  of  the  State's 
activities  with  favour  or  disfavour,  it  is  equally 
important  that  the  financial  problems  arising  from 
these  activities  should  be  solved.  Accordingly  Pro- 
fessor Bastable's  work  has  been  followed  by  a  flood 
of  special  articles,  by  the  announcement  of  a  treatise 
by  Professor  H.  C.  Adams,  and  by  a  translation  of 
some  of  Professor  Conn's  published  writings  on  the 
subject. 

1  Leroy-Beaulieu,   however,   covers  all   but  expenditure  in  a 
masterly  manner. 


INTR  OD  UC  TION  7 

SEC.  3.    On  account  of  the  close  relation   exist- 
ing between  Public  Finance  and  Political  Economy, 
most  of  the  discussions  as  to  the  proper   The  same 
method  for  the  latter  bear  with  equal  methods  avail- 

_  able  as  in 

force  upon  the  fdrmer.1  But  the  nature  political 
of  the  materials  with  which  Public  Fi-  Economy. 
nance  deals  is  such  that  in  general  the  inductive 
method  has  a  wider  possible  scope,  and  the  deduc- 
tive a  narrower  field  than  in  the  larger  science. 
The  historical  and  comparative  method  is  most  ser- 
viceable for  ascertaining  the  conditions  under  which 
different  kinds  of  taxation  work.  The  general  ef- 
fects of  taxation,  its  shifting  and  incidence,  the 
effect  of  expenditure  and  public  debts,  can  be  best 
studied  deductively.  The  deductions  in  this  case 
are  derived  from  the  conclusions  reached  by  the 
previous  method,  and  from  principles  derived  from 
Political  Economy.  Inasmuch  as  the  purpose  of 
the  present  book  is  merely  to  expound  principles 
already  determined  by  the  science  and  to  use  the 
facts  of  financial  practice  rather  as  illustration  than 
as  proof  of  the  doctrines  advanced,  it  will  not  be 
necessary  to  acquaint  the  reader,  in  each  case,  with 
the  method  used  to  ascertain  the  truths  stated. 
In  the  main,  therefore,  we  shall  follow  what  has 
been  aptly  called  the  method  of  instruction,  which 
is  in  a  sense  an  inverted  induction,  in  which  the 
principle  is  first  stated  and  then  sufficient  facts  are 
adduced  to  show  that  the  principle  is  true. 

1  Cf.  Keynes'  Scope  and  Method  of  Political  Economy. 


8  INTRODUCTION  TO  PUBLIC  FINANCE 

The  subject  falls  naturally  into  four  parts:  (1) 
Public  Expenditure,  (2)  Public  Revenue,  (3)  Pub- 
Divisionofthe  lie  Debts,  (4)  Financial  Administration. 
subject.  of  these,  Public  Expenditure  and  Fi- 

nancial Administration  have,  until  recently,  not 
been  the  subject  of  important  works  in  the  Eng- 
lish language,  and,  therefore,  a  few  words  in  de- 
fence of  their  incorporation  are  necessary.  Public 
Expenditure  is  as  much  a  part  of  Public  Finance  as 
Consumption  is  of  Political  Economy.  While  it 
belongs  peculiarly  to  Political  Science  to  determine 
what  the  lines  of  expenditure  shall  be,  just  as  it 
belongs  to  Ethics  to  teach  the  individual  in  what 
direction  he  should  use  his  wealth,  yet,  when  the 
lines  of  expenditure  have  been  determined,  its  form, 
amount,  and  effect  belong  to  Public  Finance,  just 
as  the  form,  amount,  and  effect  of  consumption  be- 
long to  Political  Economy.  Consumption,  or  the 
satisfaction  of  wants,  is  the  end  and  aim  of  all 
production  and  distribution.  So  is  expenditure  the 
end  and  aim  of  the  collection  of  revenues  and  of  the 
other  financial  activities  of  the  statesman.  To  ex- 
clude, at  least,  a  statement  of  the  forms  and  the  cus- 
Ex  enditure  ^omaiT  direction  of  expenditure  would 
should  be  be  to  overlook  the  purpose  of  all  the 
included.  regt  But  there  ig  gtill  ano^ej,  consid- 
eration that  emphasises  the  need  of  a  statement  of 
the  general  objects  of  expenditure.  The  amount 
of  expenditure  is  generally  determined  first,  and 
after  that  has  been  settled  the  required  revenue 


INTRODUCTION  9 

is  obtained.  In  this  Public  Finance  differs  mate- 
rially from  Political  Economy.  In  the  broader 
science  it  is  generally  assumed  that  the  individual 
cannot  regulate  his  income  by  his  wants,  but  must 
limit  his  wants  to  his  income.  In  some  cases  this 
difference  fades  away.  Cities  often  have  to  forego, 
temporarily  at  least,  desirable  improvements  on  ac- 
count of  the  increased  burden  they  would  impose  on 
the  finances.  But  in  general  we  find  that  the  mod- 
ern State  is  quite  as  likely  to  neglect  some  important 
and  desirable  function  which  it  could  perform,  as  to 
increase  its  functions  beyond  what  would  be  wise.1 
If  this  is  true,  and  that  it  is  so  will  be  seen  in  the 
course  of  the  discussion,  then  it  would  be  well  to 
ascertain  the  main  features  of  expenditure  at  the 
outset.  But  we  are  not  obliged  to  justify  or  con- 
demn the  different  lines  of  expenditure  that  are 
deemed  by  the  leading  nations  to  be  wise  or 
expedient.2 

1  Cf.  Cohn,  Finanzwissenschaft,  p.  183. 

2  Another  strong  objection  to  entering  into  a  discussion  of 
the  advisability  of  the  different  lines  of  expenditure,  has  been 
mentioned  above  in  the  paragraph  showing  that  Public  Finance 
should  be  studied  as  a  science  and  not  as  an  art.     If  we  discuss 
whether  certain  expenditures  ought  to  be  made,  or  should  be 
enlarged,  or  curtailed,  we  are  leaving  the  safe  scientific  ground  of 
what  is  or  will  be.    The  danger  of  thus  falling  from  the  high  plane 
of  scientific  impartiality  to  the  level  of  political  wrangling  is  fre- 
quently illustrated  by  the  work  of  Leroy-Beaulieu.    Bastable's 
work,  although  saved  from  anything  like  a  similar  failure  by  the 
author's  masterly  ability  to  defend  his  position,  is  yet  certainly 
marred  by  too  frequent  judgments  concerning  the  advisability  of 
existing  features  of  fiscal  practice. 


10  INTRODUCTION  TO  PUBLIC  FINANCE 

Financial  Administration  is  properly  regarded  as 
the  fourth  division  of  the  subject,  because  it  is  as 
necessary  to  know  how  a  State  gets  its  revenues  as  to 
know  whence  it  gets  them  and  for  what  it  spends 
them.  This  department,  too,  deals  with  a  large  num- 
ber of  technical  details  which  would  only  cumber 
the  other  parts  if  taken  up  in  connection  with  them. 

Of  the  four  divisions,  Public  Revenue  is  necessarily 
Needed  re  ^e  ^ar^es^  :  probably  for  reasons  akin 
forms  make  to  those  that  influenced  previous  Eng- 
PubiicReve-  ^  ^  writers  to  give  taxation  their  ex- 

nue  the  most 

important  elusive  attention.  It  is  here  that  the 
•part'  most  urgent  reforms  belong,  and  hence 

the  need  of  understanding  existing  conditions  is 
most  pressing. 

The  distribution  of  the  various  financial  activities 
among  the  different  divisions  of  the  government, 
federal,  national,  or  local,  will  be  noted  in  connection 
with  the  discussion  of  each  part  of  the  subject. 

SEC.  4.  The  continued  lack  of  any  systematic 
treatise  on  the  subject  has  left  classification  in  a 
Uniform  most  chaotic  state.  From  the  point  of 
method  of  view  of  form,  merely,  this  is  the  most  seri- 

classijication  i  *     .    •      *»      .    1-1   » 

for  all  parts  ous  defect  in  Bastable  s  pioneer  treatise 
of  the  subject.  on  the  subject.  It  lacks  uniformity  in 
the  methods  of  classification.  In  the  present  work 
the  attempt  has  been  made  to  use  the  same  method 
of  classification  from  beginning  to  end.  It  is  that 
suggested  by  Professor  Cohn  for  all  public  charges, 
and  afterwards  developed  in  a  somewhat  different 


INTRODUCTION  11 

way  by  Professor  Seligman.1  The  charges  made  by 
the  government  upon  individuals  vary  in  character 
according  as  the  special  benefit  conferred  upon  the 
individual  is  made  the  exact  or  the  partial  measure 
of,  or  is  not  allowed  to  affect  at  all,  the  burden  im- 
posed upon  him.  Public  Revenues  and  Public  Debts 
have  already  been  classified  in  this  way,  and  it  is  very 
easy  to  classify  Public  Expenditure  and  Administra- 
tion in  the  same  way. 

The  nature  of  this  classification  and  its  appli- 
cability to  the  whole  subject  may  be  explained  by 
reference  to  the  well-known  customs  of  „„ 

The  nature  of 

our  large  athletic  clubs.  For  member-  this  ciassifica- 
ship,  and  the  usual  privileges  of  the  club,  ^tfdly  the 
each  member  is  assessed  the  same  sum,  practice  of 
irrespective  of  the  actual  extent  to  which  athletic  clubs' 
he  uses  the  club,  and  without  reference  to  his  ability 
to  pay,  that  being  assumed  for  this  purpose  to  be 
equal  to  that  of  every  other  member,  and  certainly 
without  reference  to  any  known  ability  to  pay  more. 
This  fee  is  justified  by  the  common  benefit  con- 
ferred. If,  however,  the  member  makes  use  of  the 
dining-room,  or  asks  for  special  privileges  such  as 
the  private  use  of  the  club  quarters,  grounds,  boats, 
appliances,  etc.,  he  pays  an  additional  sum,  meas- 
ured, generally  speaking,  by  the  special  benefit  con- 

1  Cohn,  Finanzwissenschaft,  pp.  104-118,  esp.  pp.  117,  118; 
Seligman,  Quarterly  Journal  of  Economics,  May,  1892  and  1895. 
Hints  of  the  same  classifications  are  found  in  Malchus  and  Hoff- 
man. 


12  INTRODUCTION  TO  PUBLIC  FINANCE 

f erred  upon  him.  Again,  if  the  club  is  in  debt,  or 
proposes  to  enlarge  its  facilities,  not  infrequently 
a  subscription  paper  is  passed  around  and  each 
member  is  urged  to  contribute,  not  the  same  amount 
all  others  have  subscribed,  nor  yet  in  proportion  to 
the  use  he  makes  of  the  club,  but  "  as  much  as  he 
is  able."  And  lastly,  there  are  not  infrequently 
cases  where  poor  but  promising  athletes  have  been 
admitted,  in  order  that  the  club  may  have  the  glory 
of  their  prowess,  and  have  been  excused  from  dues. 

Now  there  is  an  almost  perfect  analogy  between 
such  a  club  and  the  State  in  respect  to  the  con- 
tributions demanded,  the  benefits  conferred,  and 
the  method  of  operation.  Generally  speaking,  the 
State  endeavours,  in  collecting  revenues,  to  impose 
an  equal1  burden  upon  all  for  the  support  of  those 
functions  that  are  regarded  as  conferring  a  common 
benefit,  and  a  special  burden  for  the  support  of 
those  activities  which  confer  a  special  benefit,  and 
under  certain  circumstances  to  increase  the  burden 
imposed  upon  the  very  wealthy,  who  are  regarded  as 
able  to  bear  more ;  and  lastly,  to  tax  all  for  the 
support  of  the  poor.  Not  that  the  State  always 
succeeds  in  its  endeavour,  nor  that  all  States  recog- 
nise equally  the  desirability  of  the  attempt;  for 
in  Public  Finance  expediency  necessarily  plays  a 
large  part.  But  most  States  have  come  to  recog- 
nise more  or  less  clearly  these  ideals,  and  their 
policy  can  be  conveniently  summarised  in  this  way. 
1  What  is  meant  by  "  equal  "  will  be  discussed  later. 


INTRODUCTION  13 

The  various  activities  of  the  State  can  be 
easily  classified,  according  to  the  degree  of  common 
or  special  benefit  they  are  supposed  to  state  activi- 

confer  upon  the  citizens,  or  tax-payers.   ties  confer 

common  bene- 

The  various  groups  shade  into  one  an-  fit  or  special 
other,  of  course.  But  the  extremes  are  benefi*' 
perfectly  clear  and  fundamentally  different.  Thus, 
it  is  universally  admitted  that  the  functions  of  the 
general  administrative  and  legislative  departments 
are  of  such  a  character  as  to  give  a  common  benefit, 
for  which,  ideally,  every  one  should  pay  according 
to  some  scheme  of  supposed  equality.  But  at  the 
other  extreme  there  are  many  things  done  by  the 
State  which  confer  so  special  a  benefit  as  to  justify 
a  special  charge.  For  example,  when  the  State 
carries  a  passenger  or  a  box  of  freight  over  its  rail- 
road, or  carries  a  letter,  or  provides  the  citizens 
with  china  or  tobacco,  it  confers  a  special  benefit. 
Between  these  two  extremes  there  are  any  number 
of  grades,  according  as  the  predominant  thought  is 
that  of  common  or  special  benefit,  when  both  ideas 
are  present.  But  there  is  one  more  consideration 
that  must  be  introduced.  There  are  a  certain  num- 
ber of  State  activities  which  it  is  in  the  interest  of 
the  whole  to  have  performed,  but  which  accrue  to 
the  special  benefit  of  certain  classes,  who  on  account 
of  poverty  are  unable  to  pay  for  that  benefit;  and 
if  the  State  is  to  perform  these  functions,  it  must 
call  upon  the  other  classes  for  assistance,  excusing 
the  poorer.  Theoretically,  the  support  of  the  poor 


14  INTRODUCTION  TO  PUBLIC  FINANCE 

and  defective  classes  is  an  activity  conferring  a 
common  benefit  upon  all  the  other  members  of 
society,  and  hence  they  are  called  upon  to  contribute 
accordingly.  If  we  consider  it  the  moral  duty  of 
society  as  a  whole  to  help  the  weak,  then  the  relief 
of  the  poor  confers  a  common  benefit.  It  is  the  same 
if  we  look  upon  poor  relief  from  a  less  altruistic  point 
of  view,  and  consider  that  society  is  merely  protect- 
ing its  own  interest,  as,  for  example,  in  isolating  the 
feeble-minded,  so  that  they  shall  not  propagate  their 
weakness.  Without  going  farther  into  details,  which 
will  receive  attention  later  in  the  book,  it  is  now  clear 
that  this  method  provides  a  feasible  way  of  classify- 
ing public  activities  and  public  revenues.  When 
we  once  have  a  satisfactory  classification  of  revenues, 
it  is  easy  to  classify  debts,  inasmuch  as  they  rest 
upon  the  revenues.  The  administrative  features  of 
the  financial  bureaux  will  fall  naturally  into  place 
also. 

A  single  method  of  classification,  therefore,  will 

pervade   the   work  from    beginning   to   end.      The 

classification  will   help  us  to   get  at  the  economic 

.,  f  features  of  expenditure,  reveal  the  justi- 

this  classified-  fication   and   measure   of   taxation,    and 

show  us  the  essential  character  of  each 

kind   of   public    debt;   namely,  the   kind   of   credit 

upon  which  it  is  based. 

It  must  not  be  understood  that  the  assignment  of 
any  activity  to  a  particular  group  is  permanent. 
Activities  that  were  once  regarded  as  conferring 


INTRODUCTION  15 

special  benefit  —  as,  for  example,  a  large  part  of  the 
administration  of  justice  —  come  in  time  to  be  re- 
garded as  of  common  benefit.  Such  changes  often 
proceed  with  rapidity,  and  the  stages  are  not  passed 
through  synchronously  by  all  States. 
There  are,  for  example,  many  cities  which  toward  public 
let  private  individuals  provide  the  water  a°twities 

changes.    A 

supply.     Others   provide  it  themselves,  general  move- 
on,    precisely   the    same   terms   as   indi-  menftowafd 

J  the  idea  of 

viduals  would,  while  others  provide  it  common  dene- 
much  as  they  do  other  special  privileges,  &' 
regarded  as  conferring  both  special  and  common 
benefits;  and  very  probably  the  time  is  near  when 
most  large  cities  will  regard  it  quite  as  much  a 
matter  of  common  benefit  to  provide  each  and 
every  citizen  with  at  least  a  certain  amount  of 
water  at  the  cost  of  the  general  taxes,  as  they  now 
regard  it  a  matter  of  common  benefit  to  dispose  of 
the  sewage,  a  function  which  was  once  considered 
the  duty  of  each  citizen,  and  is  still  so  regarded  in 
many  cities.  But  however  mutable  our  classes  may 
be,  they  are  clearly  discernible,  and  it  is  generally 
only  by  slow  degrees  that  we  find  cities  proceeding 
from  one  end  to  the  other  of  the  systematic  grouping. 
While  there  seem  to  be  general  tendencies,  which 
transfer  all  activities  from  the  special  someactivi- 
benefit  to  the  common  benefit  plan,  there  ties  cease  to  be 

regarded  as  of 

are  a  few  exceptional   cases  where  the  common  dene- 
movement  is  the  other  way.    The  support  &• 
of  religion  is  such  an  instance.     Originally  almost 


16  INTRODUCTION  TO  PUBLIC  FINANCE 

the  sole  object  of  State  expenditure,  this  has  now, 
after  passing  through  various  ups  and  downs,  come 
to  be  regarded  as  of  such  special  benefit  that  it  is 
being  gradually  excluded  from  the  sphere  of  the 
State,  and  left  to  private  support. 


PART   I 

PUBLIC  EXPENDITURE 

CHAPTER   I 

THE    NATURE    OF    THE    STATE,   ITS    FUNCTIONS   AND 
THEIR   CLASSIFICATION 

SECTION  1.  The  STATE  is  the  centre  of  Public 
Finance.  The  State  requires  money  and  services 
for  the  performance  of  its  functions.  The  first 
question  is  what  is  the  nature  of  the  State,  and  what 
are  its  functions  ?  To  answer  this  we  shall  have  to 
borrow  a  little  from  Political  Science.  The  best 
recent  authorities  on  Political  Science  seem  to  an- 
swer the  question,  "  What  is  the  State  ? "  with  a 
more  or  less  expanded  but  not  essentially  modified 
restatement  of  Aristotle's  famous  dictum :  "  It  is 
manifest  that  the  State  is  one  of  the  things  that 
exist  by  nature,  and  that  man  is  by  nature  a  political 
animal."  The  State  is  an  organism  into  The  state  an 
which  the  individual  is  born,  and  through  organism. 
which  alone  he  can  hope  to  reach  his  highest  devel- 
opment. Upon  its  existence,  and  the  perfection  with 
which  it  performs  its  functions,  depends  the  degree 
c  17 


18  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

of  social  organisation  possible.  The  State  seems  to 
be  God-given  to  enable  society  to  organise  on  a  grand 
scale  for  the  accomplishment  of  practical  ends  far 
beyond  the  reach  of  the  individual,  —  ends  upon 
which  the  welfare  of  the  individual  depends.1 

The  two  opposing  theories  as  to  the  proper  sphere 
of  the  State,  Individualism  and  Socialism,  stand  for 
two  grand  truths.  The  one  for  the  truth  that  the 
individual,  if  he  is  to  accomplish  his  manifest  des- 
tiny, must  be  allowed  or  assured  room  enough  for 
the  free  exercise  of  his  powers  so  as  to  develop  them, 
T  ,.  .,  7.  and  to  expand.  Such  individual  devel- 

Individuahsm 

and  Socialism  opment  is  necessary  for  the  advance  of 
reconcilable.  society>  The  second,  that  the  State 

affords  the  individual  the  surest  means  of  obtaining 
the  assistance  of  his  fellows,  so  necessary  to  his  own 
complete  manhood.  The  way  of  reconciling  these 
two  theories  is  pointed  out  in  the  Christian  doctrine 
that  true  freedom  consists  in  perfect  obedience  to 
the  law.  Anything  short  of  perfect  obedience  to  the 
highest  law  is  failure  to  attain  the  highest  freedom. 

The  constant  intrusion  of  the  State  on  fields  of 
The  extension  activity  previously  given  to  the  individ- 

ual  is  a  natural  result  of  the  constant 
e  a  priori,  increase  in  the  separation  of  employ- 
ments, necessitating  more  extensive  organisation. 
As  the  individual  becomes  more  and  more  depend- 

1  Cf .  Kidd,  Social  Evolution  ;  for  detailed  analysis  of  the  nature 
of  important  modern  states  see  Burgess,  Political  Science  and 
Comparative  Constitutional  Law. 


CHAP.  1  THE  MATURE   OF  THE  STATE  19 

ent  for  the  completeness  of  his  own  life  on  his 
fellows  and  their  faithful  performance  of  the  duties 
assigned  to  them,  the  organisation  of  the  State  be- 
comes correspondingly  more  perfect.  As  regards  this 
increasing  importance  of  organisation,  the  following 
will  fairly  summarise  the  practice  of  advanced  na- 
tions. It  is  impossible  to  approve  on  a  priori  grounds 
of  every  intrusion  of  the  State  into  fields  hitherto 
set  aside  for  the  individual.  Only  when  such  in- 
trusion does  not  lessen  individual  power,  energy, 
ambition,  and  ability  to  advance,  is  it  permitted. 
And  only  when  it  promises  definitely  to  increase  the 
importance  of  the  individual,  in  the  long  run,  is  it 
desirable.  The  burden  of  proof  is  therefore  in  each 
concrete  case  thrown  upon  the  persons  who  would 
have  the  State  advance  into  new  fields.  There  is  no 
absolute  limit  to,  but  only  a  general  presumption 
against,  the  assumption  of  new  functions  by  the 
State. 

SEC.  2.  If  Political  Science  cannot  in  the  nature 
of  things  give  us  any  definite,  theoretical  limits  to 
the  expansion  or  the  contraction  of  State  functions, 
can  such  limits  be  found  in  Public  Finance  ?  If  the 
common  statement  that  "  the  State  regu- 

.  Does  Public 

lates  its  income  by  its  expenditure  and  Finance  set 
not  its  expenditure   by  its   income "  is  anv limit  to 

.,  ,  i.     •.        ,    the  possible 

altogether  true,  there  can  be  no  limit  set  expansion 

by  Public  Finance  to  the  possible  expan-  of  state 

activities  f 

sion  of  State  functions.     But  there  are 

as  a  matter  of  fact  many  important  exceptions  recog- 


20  INTRODUCTION  TO  PUBLIC  FINANCE       PART  I 

nised.1  Those  exceptions  are  :  (1)  that  statesmen 
in  deciding  as  to  the  advisability  of  any  new  expen- 
diture necessarily  consider  the  amount  of  burden  it 
will  impose  on  the  tax-payers.  The  expansion  of 
municipal  activities  in  the  last  twenty-five  years  has 
been  so  rapid  that  at  present  any  further  expansion 
is,  in  many  instances,  at  least  temporarily  checked 
by  the  difficulties  in  the  way  of  meeting  the  cost. 
(2)  There  are  some  instances  where  for  political 
reasons  income  has  outrun  what  was  regarded  as  wise 
expenditure  and  new  ways  of  spending  have  had  to 
be  devised.  This  is  a  decidedly  more  unfortunate 
state  of  affairs  than  the  other,  for  such  forced  expen- 
diture seldom  takes  a  wise  direction.  Witness  the 
wholesale  plundering  of  the  United  States  treasury 
for  pensions.  (3)  Expenditures  may  sometimes  rise 
very  rapidly,  and  necessarily  so,  at  a  time  when  it 
would  be  extremely  unwise  to  attempt  to  increase 
the  revenues.  At  such  times  the  practice  of  nations, 
—  a  practice  that  has  proven  itself  wise,  —  has  been 
to  let  expenditure  run  beyond  the  income  and  borrow 
the  difference. 

One  of  the  prime  requisites  of  a  good  system  of 
public  revenues  is  that  the  sums  taken  from  the 
A  limit  set  by  people  each  year  in  the  various  ways 

ff^teadinesl      sha11    be    aS    Stead^    aS    Possible'        The 

in  revenues,      reason  for  this  will  be  macHrcIeaf  under 

the   general   consideration   of  revenue.    \hat  lEact, 

however,  forbids  our  determining  theannual  reve- 

1  Cf.  Bastable,  p.  42 ;  Wagner,  I.,  sec.  11. 


CHAP.  I  THE  NATURE  OF  THE  STATE  21 

nues  absolutely  by  the  annual  expenditures.  The 
general  practice  of  nations  is  to  increase  expendi- 
ture, (a)  when  it  is  absolutely  necessary,  (5)  if  not 
absolutely  necessary,  when  it  offers  advantages  which 
more  than  compensate  for  the  increased  burden  on 
the  revenues.  The  experience  of  nations  has  also 
shown  that  it  is  universally  better  to  . 

J  Practice  of 

do  the  public  business,  if  expenses  are  nations  recbg- 
increasing  rapidly,  on  a  deficit  rather  nue8ahm*- 
than  on  a  surplus.  If  expenses  are  for  a  consider- 
able period  quite  uniform,  the  usual  policy  is  to 
keep  the  revenues,  as  nearly  as  possible,  equal  to 
them,  but  not  in  excess  of  them,  and  when  expenses 
can  for  some  reason  be  lessened,  some  of  the  reve^ 
nues  may  be  applied  to  the  amortisation  of  accumu- 
lated deficits.  It  would  seem,  then,  that  steadiness 
of  revenue  is  treated  as  the  more  important  consid- 
eration. Herein  lies  a  limit,  but  not  an  absolutely 
fixed  one,  to  the  expansion  of  expenditure  and  of 
State  functions. 

To  sum  up  :   the  general  character  of  public  ex- 
penditure, especially  as  to   whether   imperative   or 
not,  as  well  as  to  its  particular  direction,  summary  of 
will   depend   primarily  upon   considera-  the  argument 

.  .  _  _   f.  a*  to  the  limi- 

tions  which  belong  to  Political  Science,  tation  of  state 
Its  amount  will  depend  on  the  revenue-  functions. 
yielding  strength  of  the  State,  and  upon  the  effect 
which  such  expenditure  will  have  ttereon.  The 
danger  made  so  much  of  by  some  writers *  lest, 
1  Roscher,  sec.  109. 


22  INTRODUCTION  TO  PUBLIC  FINANCE      PARTI 

revenues  being  obtainable  by  compulsion,  that  com- 
pulsion be  exercised  for  the  benefit  of  interested 
persons,  who  gain  particularly  by  the  increased 
spending,  is  in  a  democracy  replaced  by  the  corre- 
sponding danger  lest  too  meagre  supplies  be  granted 
by  the  voters  who  must  themselves  pay  the  larger 
part  of  the  revenues,  and  advisable  or  even  neces- 
sary lines  of  expenditure  be  omitted  or  seriously 
curtailed. 

SEC.  3.  Expenditure,  like  every  other  feature  of 
Public  Finance,  changed  radically  in  character  and 
direction  during  the  eighteenth  century.  Therefore, 
before  proceeding  to  analyse  present  expenditure, 
we  shall  do  well  to  take  a  brief  survey  of  expendi- 
ture before  this  century.  In  the  early  stages  of  State 
life  the  forms  of  property  were  few,  public  life  was 
identified  with  the  family  and  with  religious  life. 
There  was  little  call  for  definite  public 

Public  ex- 
penditure in  expenditure.  The  chief  item  was  for 
early  times.  religious  observances,  and  for  these  pur- 
poses only  was  there  a  distinct  public  treasury. 
Foundations  for  the  support  of  religious  observ- 
ances, as  seen  in  Greece  and  Rome,  are  extremely 
old.  The  temples  have  their  own  groves,  lands, 
mines,  and  flocks,  receive  contributions,  and  exact 
a  tariff  for  their  services.  Materials  for  the  study 
of  this  period  are  scant.  Services  of  a  public  char- 
acter are  performed  by  all  citizens  as  a  matter  of 
course.  In  war  they  are  the  warriors,  they  furnish 
their  own  arms.  Their  reward  is  in  the  success  of 


CHAP.  I  THE  NA  TURE  OF  THE  STA  TE       *  23 

their  enterprise.  By  mutual  effort,  or  the  slave 
labour  of  conquered  peoples,  they  build  their  fortress- 
cities,  ships,  roads,  and  temples.  The  simplicity  of 
economic  life  forbids  the  rise  of  any  proper  system 
of  public  revenues.  Taxes  are  levied  on  conquered 
peoples,  but  the  free  citizen  is  exempt.  There  is 
practically  no  division  of  labour  in  State  matters 
which  would  call  for  a  paid  public  service.  Greece 
and  Rome  emerge  from  these  primitive  forms  with 
a  more  complicated  system  of  expenditure,  but  with 
relatively  little  advance  in  revenues. 

SEC.  4.  In  Athens  we  find  a  highly  developed 
system  of  expenditures,  almost  communistic  in  char- 
acter, and  greater  than  that  of  other  Athenian  ex- 
nations  of  Greece  on  account  of  the  penditure. 
sources  upon  which  the  city  treasury  might  draw 
and  the  peculiar  circumstances  in  which  the  city 
was  placed.1  The  expenditure  for  public  buildings 
and  public  works  was  particularly  large,  as  were 
the  extravagances  of  public  festivals  and  sacrifices, 
of  donations  to  the  people,  compensations  for  at- 
tending the  assemblies,  and  the  like.  Peculiar  to 
Athens,  among  all  the  nations  of  that  era,  was  the 
assistance  rendered  at  the  public  expense  to  the 
poor  and  especially  to  the  children  of  those  fallen 
in  war.  Regular  expenditures  are  said  to  have 
varied  from  400  to  1000  talents,  or  from  1410,400 
to  11,026,000.  Extraordinary  expenses  in  time  of 

1  The  outline  in  the  text  is  necessarily  very  brief  ;  for  a  longer 
account  see  Boeckh,  The  Public  Economy  of  the  Athenians. 


24  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

war  were  relatively  small  on  account  of  the  rendi- 
tion of  voluntary  services  by  the  citizens. 

In  Rome  there  was  no  distinct  public  budget  in 
the  earlier  days  of  the  republic.1  The  public 
wealth  was  not  distinct  from  the  private  wealth 
of  the  citizens.  With  the  increase  of  the  prov- 
Expenditure  inces  and  the  receipt  of  tribute  from 
in  Rome.  them  came  regular  methods  of  public 
expenditure.  The  items  directly  borne  by  the 
State  were  the  cost  of  the  priesthood,  of  buildings 
and  other  structures  and  roads,  of  the  army,  of  the 
general  administration,  and  of  the  distributions  of 
food,  grain  for  the  city  population,  donations  of 
money,  oil,  and  wine.  The  army  was  first  paid 
in  406  B.C.  But  for  a  long  time  afterward  the 
remuneration  amounted  to  little  more  than  the  re- 
imbursement of  expenses.  At  first  the  Emperor 
was  supposed  to  live  from  his  own  private  prop- 
erty, but  as  he  had  control  of  all  the  public  rev- 
enues, the  distinction  was  difficult  to  maintain. 
The  later  courts  were  extremely  extravagant. 

Greek,  and  especially  Roman,  expenditure  had 
many  features  similar  to  modern  expenditure.  In 
classic  civilisation,  division  of  labour  was  suffi- 
ciently developed  to  render  possible  the  pay- 
Divisionof  ment  of  those  who  devoted  all  their 
uMteeaTen  ^me  anc^  energy  to  public  affairs.  But 
diture.  continuity  of  development  is  lacking. 

From  the  fall  of  Rome  to  the  rise  of  feudalism 
L-  i  See  Marquardt,  Eomische  Staatsverwaltung,  Bd.  II. 


CHAP.  I  THE  NATURE  OF  THE  STATE  25 

there  is  a  reversion  to  the  earlier  forms  of  pub- 
lic life.  Public  expenditure  is  not  separable  from 
private.  The  citizen  serves  the  State  without  re- 
muneration, and  there  are  no  public  expenses  proper. 
SEC.  5.  It  is  the  essence  of  feudalism  that  all 
governmental  functions  are  placed  in  the  hands  of 
officials  who  are  given  the  possession  of  lands  which 
yield  the  necessary  revenues  for  the  execution  of 
those  duties.  At  the  same  time  the  relation  be- 
tween these  rulers  and  the  people  is  such  that  ser- 
vices can  be  commanded  for  public  purposes  without 
distinct  remuneration.  The  undeveloped  condition 
of  commerce  and  industry  necessitates  that  public 
contributions  shall  be  in  products  and  in  Feudal  ex- 
services.  The  chief  duties  of  a  public  penditun. 
character  that  are  performed  by  these  semi-public  of- 
ficials are  the  organisation  and  leadership  of  military 
operations  and  the  crude  administration  of  justice. 
Of  administrative  functions  in  our  modern  sense 
there  are  scarcely~any.  The  public  funds  are  so 
entirely  under  the  control  of  the  prince  that  he 
comes  to  regard  tnem  as  his  own.  At  the  same 
time  the  various  subordinate  lords,  who  were  origi- 
nally officers  of  the  crown  and  who  received  lands 
for  the  purpose  of  supporting  them  in  their  offices, 
succeed  in  retaining  possession  of  the  lands  and 
other  rights  and  privileges,  although  neglecting  the 
duties  for  which  they  were  given.  As  the  monarchi- 
cal State  emerges  from  feudalism  there  is  the  same 
complete  identification  of  the  public  purse  with  the 


26  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

private  purse  of  the  monarch,  as  there  was  of  the 
State  with  the  person  of  the  monarch.  And  this, 
too,  although  a  good  share  of  the  revenues  are  now 
derived  from  taxation.  Expenditure  is  for  the  grati- 
fication of  the  prince,  and  so  far  as  he  sees  that  his 
interest  is  the  same  as  that  of  his  people  he  spends 
for  them. 

The  advance  of  constitutional  forms  of  government 
is  everywhere  characterised  by  constant  successful 
Constitutional  attempts  on  the  part  of  the  representa- 
forms  of  gov-  tives  of  the  people,  or  of  those  who  con- 
change  the  tribute  to  the  public  purse  to  get  control 
control  of  ex-  of  the  finances.  Constitutionalism  ad- 

penditure  and  ,  ,  , 

consequently  vances  just  as  fast  as  it  succeeds  in  this 
its  character,  attempt.  At  present  the  control  of  the 
purse  is  entirely  in  the  hands  of  the  constitutional 
legislative  bodies  in  almost  all  countries,  and  the 
domains  of  the  prince,  which  were  originally  given 
him  by  the  people  in  order  that  he  might  be  sup- 
ported in  proper  dignity  in  the  performance  of  his 
public  duties,  and  were  then  diverted  by  him  to 
his  private  enjoyment,  have  been  regained  by  those 
who  gave  them,  and  are  in  most  States  once  more 
public  property.  The  expenditure  for  the  support 
of  the  crown  now  becomes  one  of  the  chief  items  on  the 
civil  list.  The  final  establishment  of  constitutional 
government  has  introduced  a  new  criterion9  for  judg- 
ing public  expenditure.  An  expenditure  is  no  longer 
a  justifiable  one  when  it  gratifies  the  whim  of  the 
ruler  or  of  the  governing  body^Wt  it  must  result  in 


<CHAP.  I  THE  NATURE  OF  THE  STATE  27 

some  clear  benefit  to  the  people  as  a  whole,  or  to 
the  nation,  or  in  a  benefit  that  is  so  regarded ; 
otherwise  it  will  not  continuously  meet  with  the 
popular  approval  which  is  now  necessary  to  sanction 
every  governmental  action. 

SEC.  6.  Many  attempts  have  been  made  to  clas- 
sify public  expenditures,  and  often  with  good  results. 
The  most  common  are  those  which  follow  more  or 
less  closely  the  usual  economic  analysis  of  private  ex- 
penditure, according  as  the  wants  satisfied  are  neces- 
sary, desirable,  or  superfluous.  The  use  Necessary, 
of  economic  terms  in  this  way  is  to  be  g^erttuous 
commended,  but  as  in  Economics,  so  expenditure. 
here,  the  vagueness  and  relativity  of  these  terms 
are  very  unsatisfactory.  Different  writers  do  not 
agree  as  to  what  are  necessaries,  even  for  the  same 
State.  After  all,  the  assignment  of  any  particular 
expenditure  to  one  or  the  other  of  these  categories 
is  merely  the  expression  of  the  author's  individual 
judgment  on  the  expenditure  in  question.1  This 
savours  too  much  of  the  art  of  Public  Finance  for 
a  scientist.  Professor  Bastable,  after  pointing  out 
this  very  difficulty,  proceeds  to  make  a  classification 
based  on  the  order  of  historical  rise  of  the  different 
functions,  or  perhaps  it  would  more  Bastabie's 
nearly  reproduce  his  thought  to  say  classification. 
that  he  tries  to  establish  historically  a  sort  of  natu- 
ral evolution  or  sequence  of  public  expenditures. 
The  difficulties  he  encounters,  in  the  search  for  such 
1  Cf.  Bastable,  p.  43. 


28  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

a  sequence,  are  so  great  that  the  results  are  not  par- 
ticularly clear  and  not  at  all  convincing.  The  diffi- 
culties arise  from  the  fact  that  such  a  process  merely 
substitutes  for  the  author's  judgment,  on  which  the 
older  classifications  rest,  the  judgment  of  the  leaders 
of  national  policy  at  different  times  and  in  different 
places  on  the  same  questions  ;  namely,  are  these  ex- 
penses necessary  or  merely  expedient  ?  He  certainly 
gains  much  by  substituting  the  point  of  view  of  past 
statesmen  for  that  of  any  present  person  or  persons. 
But  it  will  be  a  still  greater  gain  if  we  can  eliminate 
the  personal  element  entirely  and  make  a  classifica- 
tion that  does  not  depend  upon  the  way  in  which 
the  desirability  or  undesirability  of  the  different 
functions  is  regarded.  The  important  thing  in 
Public  Finance  is  not  to  ascertain  whether  or  no 
certain  functions  are  to  be  approved. 

Such  an  analysis  as  we  are  in  search  of  has  been 
suggested  by  Professor  Cohn,1  which  he  has  well 
Cohn's  eco-  called  the  "  economic  analysis  of  civic 
Z£££  housekeeping."  There  are  according  to 
housekeeping,  this  suggestion  four  groups.  The  first 
consists  of  those  functions  which  confer  so  definite  a 
benefit  upon  the  individual,  and  are  so  clearly  per- 
formed solely  for  the  benefit  of  the  individual,  that 
he  would  naturally  be  expected  to  meet  the  cost  of 
them.  I  The  second  group  consists  of  those  functions 
which  confer  a  common  benefit  upon  all  members  of 
the  State,  of  such  a  character  that  it  cannot  be  par- 
1  Finanzwissenschaft,  p.  117. 


CHAP,  i  THE  NATUEE^QM&E  STATE  29 

celled  out  and  each  portion  definitely  assigned  to 
the  respective  members.  This  group  embraces  the 
prime  functions  of  the  fundamental  institutions  of 
the  State.  These  are  the  two  extremes.  Between 
them  are  two  more  groups.  The  third  consists  of 
those  functions  which  confer  a  special  benefit  that 
might  be  separately  assigned  to  particular  persons, 
but  in  which  such  assignment  is  wholly  or  partly 
waived,  because  there  is  also  sufficient  common 
benefit  to  justify  making  such  functions  a  total  or 
partial  charge  on  the  general  ability.  Finally,  a 
fourth  group,  which  consists  of  those  functions  that 
confer  a  special  benefit  on  certain  individuals  more 
or  less  unable  to  assist  in  bearing  the  charges,  and 
which  are  consequently  treated  as  though  they  con- 
ferred a  common  benefit  upon  all  the  members  of 
society. 

Dropping,  for  the  present,  all  consideration  of 
the  ways  in  which  the  benefit  is  meas-  . 

J  The  four 

ured,    which    will    be    fully    discussed  classes  of  ev- 
under    the    head    of    revenue,   and    re-  Penditure9 

according  to 
arranging  the   groups   in   the  order   of  thebenefitcon- 

their  importance,  we  have  the  following  Serred- 
four  classes  of  expenditures  : 

First,  the  largest  and  most  important,  those  which 
confer  a  common  benefit  on  all  citizens. 

Second,  those  which  confer  a  special  benefit  on 
certain  classes  that  is  treated  as  a  common  benefit, 
because  of  the  incapacity  of  these  classes. 

Third,  those  which  confer  both  a  special  benefit 


30  INTRODUCTION  TO  PUBLIC  FINANCE      PARTI 

on  certain  persons  and  a  common  benefit  on  all 
the  others. 

Fourth,  those  which  confer  only  a  special  benefit 
on  individuals. 

Under  the  first  of  these  come  the  general  expendi- 
tures for  the  support  of  the  constitutional  agencies 
of  the  government.  The  support  of  the 
longing  to  administrative  and  legislative  depart- 
each  class.  ments,  in  almost  all  their  branches,  in- 
cluding the  diplomatic  corps,  and  everything  neces- 
sary thereto,  as  public  buildings,  etc.  Here,  too, 
belong  the  support  of  defence  and  the  maintenance 
of  internal  security  and  quiet.  Here  belong,  ac- 
cording to  modern  practice,  the  maintenance  of 
roads,  although  it  was  once  treated  as  belonging 
to  class  four,  and  passed  through  a  transition  stage 
in  class  three.  Under  this  class  belong,  also,  the 
chief  expenses  in  connection  with  the  maintenance 
of  the  money  circulation,  although  a  part  of  this 
expenditure  is  in  most  countries  to  be  assigned  to 
class  three.1  The  same  is  to  be  said  of  the  ex- 
penditure for  education.  Here  belong  the  adminis- 
trative control  and  assistance  of  private  industry 
and  commerce. 

Under  class  two  belong  the  care  of  the  poor 
and  the  defective.  Also  the  support  of  the  pen- 
sioned, unless  pensions  are  such  that  they  may  be 
regarded  as  unpaid  wages,  in  which  cas*e  they  belong 
to  the  first  class. 

1  The  United  States  once  charged  a  seigniorage  of  |  per  cent. 


CHAP.  I  THE  NATURE  OF  THE  STATE  31 

Under  class  three  come  the  administration  of 
justice,  the  provision  for  religion  wherever  the 
State  has  an  established  church,  the  general  admin- 
istration of  the  postal  service  (sometimes,  however, 
this  is  in  class  four),  the  administration  of  special 
rights,  like  patent  rights,  copyrights,  corporation 
privileges,  etc.;  also,  the  recording  of  titles,  etc., 
the  laying  out  and  grading  of  streets,  building  of 
sewers,  etc.;  so,  also,  the  water  supply  in  many 
cities,  although  the  provision  for  this  is  rapidly 
undergoing  a  development  that  will  eventually 
place  it  in  class  one. 

To  class  four  belong  almost  all  of  the  great  in- 
dustries carried  on  by  the  State  or  by  cities,  the 
monopolies  maintained  by  them  for  their  own  bene- 
fit, etc. 

As  will  be  seen  from  remarks  made  above  in 
connection  with  the  assignment  of  certain  of  these 
services  to  the  different  classes,  there  has  been,  and, 
still  continues,  a  certain  process  of  evolution  which 
may  be  generally  summed  up  as  a  tendency  for  all 
these  expenditures  to  move  from  class  four  to  class 
one.  There  are  many  instances  where  expendi- 
tures now  regarded  as  naturally  and  unchangeably 
belonging  to  class  one  were  regarded  as  belonging 
to  class  four.  When  a  government  assumes  any 
new  industrial  function,  as,  for  example,  supplying 
water  to  the  inhabitants  of  a  city,  that  function  is 
first  assigned  to  class  four  and  treated  as  though 
conferring  a  special  benefit  only.  But  it  frequently 


32  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

comes  about  that  it  is  regarded  as  a  function  con- 
ferring a  common  benefit  at  least  in  part,  and  passes 
into  class  three.  There  are  forces  at  work  which 
seem  likely  to  place  it  finally  in  class  one.  In 
the  case  of  highways  this  transition  has  been  com- 
pletely made,  and,  except  in  the  case  of  city 
streets,  which  still  belong  to  class  three  so  far  as 
construction  is  concerned,  but  pass  into  class  one 
as  soon  as  finished,  highways  are  treated  as  confer- 
ring common  benefit  only. 

In  the  following  chapters  on  expenditure  the 
order  indicated  above  will  be  followed.  The  ar- 
rangement of  the  different  expenditures  under  class 
one  will  be  somewhat  according  to  historical  origin 
and  importance. 


CHAP,  ii     EXPENDITURE  FOR   COMMON  BENEFIT        33 


CHAPTER   II 

EXPENDITURE  EXCLUSIVELY  FOB  THE  COMMON 
BENEFIT 

SECTION  1.  IN  this  chapter  we  will  consider  ex- 
penditure of  the  first  class ;  that  is,  expenditure  so 
clearly  for  the  good  of  all  that  no  special  $-et  expendi- 
charge  is  made  upon  any  of  the  Individ-  ture- 
uals  incidentally  benefited.  From  one  point  of  view 
expenditure  of  the  second  class,  wholly  for  the  bene- 
fit of  certain  persons,  who  are,  however,  exempt  from 
any  special  payments,  the  expense  being  treated  as 
involving  only  common  benefit,  is  sufficiently  like 
that  of  class  one  to  come  under  the  heading  of  this 
chapter.  But  it  has  been  made  a  part  of  the  next 
chapter  in  order  not  to  lengthen  this  one  unduly. 
Both  of  these  expenditures  might  well  be  called  net 
expenditures  in  distinction  from  those  which,  unlike 
them,  result  in  some  accompanying  revenues. 

The  first  item  is  that  for  general  administration. 
Administrative  expenditure  is  for  the   support   of 
those   officers    of   the   government   who  Administra- 
have  to  do  with  civil  affairs.     For  con-  JJ^JJ^ 
venience  it  is  best  to  limit  it  to  those  list. 
officers  whose  functions  are  absolutely  indispensable 
to  the  execution  of  the  laws.     The  officers  who  will 


34  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

be  included  vary,  from  country  to  country,  with  the 
frame  of  the  government.  It  has  been  customary 
for  financial  writers,  following  the  lead  of  the  Camer- 
alists,  to  limit  their  discussion  of  this  expenditure 
to  that  for  the  crown  and  court.  This  is,  in  Eng- 
land, called  the  civil  list.  The  peculiar  character 
of  such  expenditure  in  monarchical  countries  makes 
it  advisable  to  isolate  it.  But  it  must  be  borne  in 
mind  that  in  republican  countries  there  is  no  corre- 
sponding expenditure.  The  salaries  of  the  highest 
executive  officials  in  republics  are  of  the  same  charac- 
ter as  those  of  the  ministerial  officials  in  monarchies. 
In  England  the  civil  list  for  Her  Majesty's  privy 
purse, household,  charities,  etc.,  amount^  to  £407,629, 
and  if  we  add  the  annuities  paid  to  members  of  the 
royal  family  amounting  to  £173,000,  1he  crown  may 
be  said  to  cost  Great  Britain  nearly  ^3,000,000  per 
annum.  In  most  monarchical  countries,  these  ex- 
penses were  originally  met  by  the  revenues  from  the 
crown  estates.  But  these  revenues  from  the  domains, 
having  been  absorbed  by  the  general  treasury,  it  be- 
came necessary  to  make  provision  for  the  civil  list 
from  the  general  revenues.  To  the  civil  list  should 
be  added  the  salaries  and  other  expenses  of  the 
ministries,  their  clerks,  secretaries,  etc.  In  federal 
governments  the  administrative  departments  of  the 
component  parts  or  commonwealths,  as  well  as  that  of 
the  central  government,  should  be  included.  Finally 
there  come  the  administrative  departments  of  the 
local  governments.  It  is  very  difficult  to  ascertain 


CHAP,  ii     EXPENDITURE  FOR  COMMON  BENEFIT        35 

the  number  of  such  officials  and  almost  impossible 
to  ascertain  all  such  expenses.  According  to  the 
summary  in  the  eleventh  census  the  cost  of  all  the 
executive  departments  of  the  United  States  was 
116,770,801  in  1890.  This  does  not,  in  all  proba- 
bility, cover  more  than  half  the  cost  of  all  that 
should  be  included. 

In  monarchical  governments,  and  to  a  certain  ex- 
tent, also,  in  republican  governments,  traditional 
sentiment  demands  that  the  head  of  the 
government  shall  hold  a  social  position 
of  great  prominence  and  perform  certain  mental. 
merely  ornamental  functions,  involving  considerable 
expenditure.  So  that  the  expenditure  for  the  ser- 
vices of  the  highest  officials  is  generally  larger  than 
the  sums  which  would  be  necessary  to  obtain  merely 
efficient  service.  This  lavish  expenditure  may  be 
fully  justified  on  political  grounds,  but  as  it  involves 
great  waste,  both  directly  and  indirectly,  by  exam- 
ple, it  cannot  be  justified  on  economic  or  fiscal 
grounds.1  It  is  a  general  fiscal  principle,  applicable 
as  well  to  this  part  of  expenditure  as  to  any  other, 
that  the  expenditure  should  not  be  larger  than  is 
necessary  to  secure  the  most  efficient  service.  The 
justification  of  this  lavishness,  therefore,  must  be 
found,  if  anywhere,  in  the  creation  of  some  equal 
utility  recognised  by  Political  Science.  The  excep- 
tions made  in  practice  to  the  general  rule  of  econ- 
omy do  not  extend  beyond  the  heads  of  the  admin- 
1  Rau,  Finanzwissenschaft,  sec.  48. 


36  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

istrative  departments.  In  the  subordinate  positions 
the  remuneration  does  not  generally  exceed  that 
Saving  in  the  which  must  be  paid  for  similar  services 

o/Te'aXt"  in  Private  life'  Indeed>  there  is  a  Cer- 
istration.  tain  saving,  in  that  many  of  the  posi- 
tions, especially  where  the  tenure  of  office  is  secure 
for  a  relatively  long  period,  can  be  filled  at  a  lower 
cost  than  the  same  services  command  elsewhere,  on 
account  of  the  honour  attaching  to  them.  In  those 
countries  where  the  expenditure  for  the  higher  posi- 
tions is  largest  much  is  saved  by  the  lower  pay 
attaching  to  subordinate  positions. 

In  this  connection,  mention  may  be  made  of  the 
diplomatic  and  consular  service,  which,  while  partly 
Di  lomatic  conducive  to  the  better  performance 
and  consular  of  other  functions,  as,  for  example,  de- 
fence and  the  regulation  of  commerce, 
is  yet  properly  considered  to  be  subordinate  to  the 
executive  departments.  Here  again  the  traditional 
opinion  that  the  dignity  of  the  nation  can  only  be 
properly  sustained  by  a  lavish  expenditure  on  the 
part  of  the  ambassador  or  minister,  imposes  on  the 
treasury  burdens  far  greater  than  the  value  of 
the  services  rendered,  if  measured  by  the  ordinary 
business  standards.  As  the  means  of  communica- 
tion improve  and  the  general  efficiency  and  reliabil- 
ity of  the  news  agencies  of  the  public  press  grow, 
it  becomes  harder  and  harder  to  justify  this  extrava- 
gance even  on  political  grounds.  The  custom  of 
lavish  expenditure  for  diplomatic  services  has  not 


CHAP,  ii    EXPENDITURE  FOR  COMMON  BENEFIT       37 

been  carried  to  such  extremes  by  the  United  States 
as  by  other  countries.  As  these  positions  are  more 
or  less  of  the  nature  of  political  prizes,  in  that 
country,  this  has  probably  been  to  the  improvement 
of  the  service.  Foreign  intercourse  cost  the  United 
States  11,583,118,  in  1894,  while  Great  Britain  paid 
£531,392,  or  $2,656,960,  for  that  service,  not  in- 
cluding colonial  services  of  practically  the  same 
character,  which  would  bring  the  amount  up  to  over 
£ 900,000.  Generally  speaking,  the  executive  de- 
partment costs  comparatively  little  outside  of  the 
actual  salaries.  There  are  some  election  and  similar 
incidental  expenses,  but  not  many. 

To  the  administrative  department  belongs  the 
expenditure  for  the  collection  of  the  revenues. 
Although  this  is  a  part  of  the  gross  Thecost0f 
expenditures  only,  it  is  properly  included  collecting  the 
in  the  general  accounts  so  as  to  render  r 
control  possible.  England  spends  on  the  collection 
of  the  customs  duties  £871,915,  on  that  of  the  in- 
land revenues  £1,814,039,  on  the  post-office  gains 
£7,037,785  ;  the  cost  of  collecting  the  total  reve- 
nues of  £100,660,881  is  £13,249,293,  or  about  thir- 
teen per  cent.  This  seems  an  extraordinarily  large 
deduction,  but  the  amount  is  large  because  of  the 
large  amount  of  expenses  connected  with  the  rela- 
tively small  returns  of  the  post  office  and  the  deficits 
of  the  telegraph  and  some  other  services.  The  cost 
of  collecting  customs  is  only  about  four  per  cent,  of 
collecting  the  inland  revenues  about  three  per  cent. 


38  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

In  the  United  States  the  cost  of  collecting  the  cus- 
toms duties  was  about  three  per  cent  in  1893,  and 
five  per  cent  in  1894.  The  receipts  fell  off  in  that 
period  from  $200,000,000  to  1130,000,000,  but  the 
expenses  did  not  fall  off  correspondingly.  The  cost 
of  collecting  the  internal  revenues  in  1893  was 
about  two  and  one  half  per  cent,  in  1894  it  was 
about  three  per  cent. 

SEC.  2.    The  expenditure  involved  in  the  payment 
of  salaries  to  legislative  officers,  when  any  such  are 
paid,  is  not  the  largest  part  of  the  ex- 


The  expense 
of  the  legisla- 
tive depart- 


penses  caused  by  the  maintenance  of 
such  bodies.  There  are  the  clerks, 
aides,  pages,  etc.,  in  immediate  attend- 
ance upon  the  bodies  during  their  session,  the  ex- 
penses of  elections,  which  in  this  case  swell  to  con- 
siderable amounts,  the  costs  of  investigations,  public 
hearings,  etc.,  necessary  to  put  the  legislature  in  pos- 
session of  the  facts  upon  which  to  base  their  actions, 
and  the  expenses  of  promulgating  laws,  publishing 
speeches,  reports,  etc.,  all  of  which  together  form  no 
inconsiderable  burden  on  the  finances  of  every  nation 
enjoying  legislative  government.  These  expenses, 
also,  extend  from  the  federal  government  down  to 
the  municipal'  governments.  The  desirableness  or 
undesirableness  of  paying  legislative  officers  for 
their  services  is  a  matter  for  Political  Science  to 
determine,  and  depends  in  large  measure  upon  the 
traditions  of  the  different  peoples.  In  England 
relatively  little  is  spent  in  this  way  in  any  of  the 


CHAP,  ii    EXPENDITURE  FOR   COMMON  BENEFIT       39 

legislative  departments  of  the  government  from  Par- 
liament down  to  the  parish.  But  in  that  country 
there  is  a  tradition  of  unpaid  public  service  that 
gives  her  much  help  in  this  direction.  In  the 
United  States  the  direct  emoluments  and  other 
legitimate  expenses  of  the  Federal  Congress,  and 
the  direct  and  indirect,  more  or  less  illegal,  raids 
by  the  commonwealth  legislatures  on  the  treasuries, 
as  well  as  those  made  by  the  city  councillors  and 
aldermen,  are  very  large.  It  has  been  estimated  by 
Mr.  Moffett 1  that  in  the  52d  Congress  of  The  cost  of 
the  United  States  it  cost  $4,593,922.60  Congress. 
to  maintain  the  House  of  Representatives  alone, 
exclusive  of  election  expenses,  or  about  $6285  a 
day  for  each  day  of  its  existence  including  Sundays 
and  holidays.  Of  this  amount  13,320,000  went  for 
salaries.  There  were,  therefore,  $1,180,000  spent  on 
travelling  expenses,  clerks,  subordinate  house  officials, 
and  contingent  expenses  (including  about  $100,000 
for  stationery  and  newspapers).  But  this  is  by 
no  means  all.  The  expenses  traceable  mainly  to 
this  source  in  the  reports  of  the  auditors,  of  which 
public  printing  for  Congress  is  an  important  item, 
foot  up  to  about  $7,000,000  per  annum,  or  for  the 
two  years  of  the  life  of  a  Congress  $14,000,000. 
The  real  cost  of  the  federal  legislature  to  the  coun- 
try is  even  larger  than  that,  but  the  items  are  not 
easily  traceable  in  the  reports,  and  some  of  them, 
like  election  expenses,  are  not  reported.  Directly 
1  Suggestions  on  Government,  p.  150. 


40  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

traceable  to  the  legislative  departments  of  both  the 
federal  and  commonwealth  governments  were,  in 
The  cost  of  1890,  110,500,000.  The  only  expenses 
Parliament,  directly  attributable  to  this  source  in 
England  are  for  the  officers  of  the  House  of  Lords 
£41,595,  for  the  officers  of  the  House  of  Commons 
£52,133;  total  £93,728.  But  many  expenses  attrib- 
uted to  the  different  departments  should  be  included. 
The  fact  that  the  ministry  is  at  the  same  time  execu- 
tive and  legislative  causes  a  different  distribution  of 
the  cost,  and  it  is  impossible  to  arrive  at  an  esti- 
mate even  as  accurate  as  in  the  case  of  the  United 
States.  England  does  riot  print  public  documents 
for  free  distribution,  so  that  the  expense  for  station- 
ery and  printing  is  less  than  half  that  of  the  United 
States,  being  a  little  over  £500,000. 

Some  mention  should  also  be  made  of  the  expenses 
involved  in  the  support  of  local  or  semi-local  legisla- 
tive bodies.  For  the  United  States,  there  are  the 
Cost  of  local  State  legislatures  and  the  city  councils, 
councils.  an(^  for  England,  the  local  govern- 
ment board  and  the  county  and  municipal  councils. 
Of  these,  only  the  commonwealth  legislatures  are 
purely  legislative  in  character.  The  others  perform 
functions  which  are  better  described  as  administra- 
tive. It  is  so  difficult  to  obtain  a  correct  estimate 
of  the  particular  expenses  for  the  support  of  these 
subordinate  bodies  as  to  be  an  unprofitable  task. 
These  bodies,  too,  are  so  intimately  concerned  in 
the  administration  of  the  other  functions  that  we 


CHAP,  ii     EXPENDITURE  FOR   COMMON  BENEFIT       41 

gain  little  by  isolating  the  mere  expenses  of  their 
maintenance.  With  the  commonwealth  legislatures, 
however,  the  matter  is  different.  These  are  purely 
legislative.  In  most  commonwealths  the  The  cost  of 
legislatures  are  paid  per  diem,  and  they  C^ 
are  prevented  from  running  up  too  large  latures. 
bills  by  the  limitation  of  their  term.  The  per  diem 
remuneration  and  mileage  are  fixed  by  law,  and 
range  from  $5  to  $10  a  day  and  from  five  cents  to 
ten  cents  per  mile.  A  loophole  for  additional  ex- 
pense is  left  by  the  necessity  of  allowing  the  legisla- 
ture to  appropriate  money  for  incidental  expenses. 
In  some  commonwealths,  as  for  example  in  Califor- 
nia, this  power  is  abused  to  such  an  extent  that  the 
contingent  expenses  amount  to  much  more  than  the 
mileage,  regular  clerk  hire,  etc.,  combined.  Money  is 
spent  for  the  hire  of  personal  attendants  on  members, 
stenographers,  clerks,  etc.,  for  tours  of  inspection  to 
various  institutions,  and  the  like.  Most  of  this  ex- 
penditure contravenes  the  rule  of  economy.  Eng- 
land in  the  absence  of  the  federal  system  is  spared 
this  expense. 

SEC.  3.    The    construction    and    maintenance    of 
public  buildings  for  the  convenience  of  the  execu- 
tive and  legislative  departments  and  for  puwic  build- 
other  purposes  is  one  of  the  most  impor-  in9s- 
tant  although  not  one  of  the  largest  items  of  expen- 
diture.     The  construction  of  such  buildings  is  of 
course  necessary.     That   they  should  be   imposing 
edifices,  handsomely  decorated  and  equipped,  is  a 


42  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

matter  of  national  pride.  That  their  construction 
should  not  be  wasteful  is  self-evident.  The  extrava- 
gances and  theft  which  have  too  often  accompanied 
the  construction  of  such  buildings  in  the  United 
States  are  too  well  known  to  need  discussion.  They 
are  purely  abuses  and  need  no  farther  words  of  con- 
demnation than  they  have  always  received.  The 
cost  of  construction  may  be  regarded  as  a  permanent 
investment,  not  yielding  a  money  revenue,  but  far 
greater  utilities.  The  federal  government  spends 
annually  about  13,500,000  upon  public  buildings. 
From  1789  down  to  1882  it  spent  $85,591,590  for  the 
same  purpose,  pr  an  average  of  about  $900,000  per 
annum.  In  1890,  all  the  different  branches  of  the 
government  together  in  the  United  States  spent 
$56,841,147  upon  public  buildings.  The  British 
government  spent,  in  1894,  XI, 750,000  on  the  special 
account  of  public  buildings,  but  there  are  a  good 
many  similar  expenses  included  in  the  other  supply 
services. 

The  exact  annual  value  of  these  utilities  to  the 
government  cannot  be  directly  estimated  in  money. 
The  value  of  Indirectly  it  might  be  estimated  as  the 
public  build-  equivalent  of  the  interest  on  the  sums 
tnff*'  which  it  would  cost  to  replace  them  in 

the  most  economical  manner,  less  the  annual  cost  of 
the  repairs.  As,  in  most  cases,  the  original  expendi- 
tures were  extravagant  and  wasteful,  this  method 
of  computation  would  result  in  a  smaller  sum  than 
the  interest  on  the  original  cost. 


CHAP,  ii    EXPENDITURE  FOR  COMMON  BENEFIT        43 

SEC.  4.  A  nation  differs  from  individuals  in  that 
no  law  can  be  imposed  upon  it  by  any  external  human 
power.  The  enforcement  of  the  rights  and  obliga- 
tions of  nations  in  their  intercourse  with  one  another 
is  left  to  the  different  nations  themselves.  As  long 
as  international  law  offers  no  peaceful  means  of  re- 
dressing wrongs,  war  is  the  only  recourse.  "  Inter- 
national law,"  says  Woolsey,  "assumes  that  there 
must  be  'wars  and  fightings'  among  the  nations." 
This  assumption  is  universally  correct.  There  are 
no  signs,  as  yet,  that  nations  will  cease  to  con- 
sider that  war,  or  at  least  the  actual  preparation 
therefor,  as  its  sole  preventive,  is  an  Thecosto^ 
absolute  necessity.  The  whole  theory  of  defence  is  un- 
the  independence  and  equality  of  sover-  ° 
eign  States,  upon  which  international  law  proceeds, 
throws  the  maintenance  of  national  dignity,  honour, 
and  recognised  national  rights  upon  the  nations 
themselves.  The  extent  and  character  of  prepara- 
tion for  war  in  each  State  depends  upon  its  his- 
tory, national  character,  and  geographical  situation. 
Thus,  the  warlike  traditions,  the  mutual  distrust, 
and  contiguity  of  France  and  Germany,  impel  to 
extensive  preparation  for  war,  and  similar  con- 
siderations affect  other  nations  of  Europe.  On 
the  other  hand,  the  traditions,  national  character, 
and  geographical  position  of  the  United  States  have 
led  to  a  feeling  of  security,  and  a  preparation  so 
insignificant  compared  to  European  armaments,  as 
to  call  forth  continual  warnings  and  protests  from 


44  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

military  authorities.  The  necessity  and  probable 
continuance  of  this  burden  on  the  finances  of  na- 
tions being  thus  predetermined,  the  only  task  for 
the  student  of  finance  is  to  ascertain  how  great  a 
burden  this  imposes  on  the  treasuries  and  what 
possibility  there  is  for  some  return. 

There  has  been  much  discussion  of  the  relative 
merits  and  economy  of  the  different  methods  of 
DOT  re  ts  s  armv  organisation.  It  is  pointed  out 
tems  of  army  that  the  German  system  of  compulsory 
organisation.  servjce  of  an  citizens  without  remunera- 
tion shows  a  much  smaller  cost,  per  man,  than  the 
English  and  American  system  of  paid  enlistment. 
But  it  is  urged  again  that  there  are  in  Germany 
a  larger  number  of  expenses  involved  in  the  army 
system,  than  those  of  the  government,  as  the  per- 
sonal expenditures  of  the  soldiers,  the  cost  to  the 
country  from  the  disturbance  of  production,  the 
extra  costs  of  enrolment,  of  free  quarters  during 
manoeuvres,  etc.,  which  do  not  appear  in  the  budget, 
but  which  should  be  counted  in  before  any  fair 
comparison  can  be  made.  It  would  seem  that,  in 
the  end,  the  actual  expenditure  for  this  purpose 
could  only  be  as  much  less,  per  man,  as  the  standard 
of  life  of  the  soldier  is  less  in  the  one  country 
than  in  the  other.  And  on  this  ground  it  might 
be  urged  that  the  German  system,  which  gives  the 
soldier  but  little  spending  money  to  waste,  and  by 
very  strenuous  measures  inculcates  thrift  and  almost 
penurious  economy,  was  on  the  whole  the  cheaper. 


CHAP.  II    EXPENDITURE  FOR   COMMON  BENEFIT       45 

How  much  again  this  lessens  the  efficiency,  per 
man,  and  necessitates  a  larger  number  of  soldiers  is 
hard  to  estimate.  In  England  the  volunteer  system, 
while  adding  somewhat  to  the  cost,  does  not  make 
as  heavy  drains  on  the  treasury  as  do  the  German 
reserves ;  but  as  the  expenditure  by  the  individual 
members  of  the  volunteer  service  is  for  a  public 
purpose,  it  is  a  part  of  the  cost  of  the  system,  and 
a  part  that  is  very  difficult  to  estimate.  On  the 
whole  no  accurate  comparison  is  possible.  The  act- 
ual expenses  of  the  different  nations*  as  they  ap- 
pear in  the  budgets  are  as  follows :  England  1894- 
1895,  army  £18,000,000,  navy  £18,700,000,  together, 
£36,700,000.  United  States  1895,  army  154,500,000, 
navy  131,700,000,  total  186,200,000,  but  this  in- 
cludes over  $16,000,000  for  the  construction  of  new 
vessels.  Including  the  amounts  spent  by  the  com- 
monwealths the  total  expenditure  for  military  pur- 
poses and  the  navy  were,  in  1890,  $57,544,617. 
One  of  the  main  features  of  the  American  system  is 
the  establishment  of  training  schools  for  officers,  cost- 
ing $360,000  for  the  military  and  $220,000  for  the 
naval  academy.  In  most  countries  this  is  a  rapidly 
growing  expenditure. 

The  expenses  of  actual  war  are  not  a  part  of  the 
regular  budget  of  modern  nations.  They  are  always 
treated  as  exceptional  or  extraordinary  The  expense  of 
expenses.  Besides  the  sums  actually  ex-  war- 
pended  by  the  public  treasury  there  are  many  indi- 
rect losses  and  expenses  involved.  According  to  the 


46  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

estimates  of  Wilson  the  cost  of  wars  to  England  from 
1688  to  the  present  time  was  over  £  1,258,680,000. 
The  cost  to  the  United  States  of  the  Civil  War  is 
hard  to  estimate.  The  debt  incurred  amounted  to 
$1,845,900,000  ;  $800,000,000  of  revenues  were  spent 
during  the  war  ;  commonwealths  and  cities  spent  a 
part  of  their  current  revenues  and  rolled  up  debts, 
and  the  pensions  will  probably  amount  to  over 
12,000,000,000.  $6,000,000,000  represents  approxi- 
mately the  actual  expenditure  by  all  the  govern- 
mental agencies  on  the  side  of  the  North. 

The  general  preparation  for  internal  peace  and 
security  and  the  prosecution  or  punishment  of  the 
intemaipeace  disturbance  of  that  security  by  individ- 
and  security.  uais  or  small  groups  of  persons  is  a  very 
important  item  of  expense.  Such  security  is  gen- 
erally maintained  by  the  police  and  the  military. 
In  the  United  States  the  chief  expense  is  borne  by 
the  cities.  The  States  and  counties  have  their  own 
police  officers  for  this  purpose,  as  do,  also,  towns  not 
cities.  The  cost  of  the  police  for  the  whole  of  the 
United  States  was,  in  1890,  $23,934,376. 

SEC.  5.  The  building  and  maintenance  of  roads 
is  a  source  of  expenditure  which  well  illustrates  the 
general  trend  of  development.  Adam  Smith  re- 
Thecostof  garded  the  maintenance  of  roads  as  an 
roads,  a  com-  activity  conferring  so  special  a  benefit  on 

mon  burden.      ^  individual   uger   that  he   should   bear 

the  burden.     Even  Bastable  places  them  among  the 

"industries  of  the  State."1     But  the  universal  ten- 

i  Pp.  193, 194. 


CHAP,  ii    EXPENDITURE  FOR  COMMON  BENEFIT       47 

dency  is  to  make  the  maintenance  of  roads  a  common 
burden  because  conferring  a  common  benefit.  The 
care  of  the  roads  is  generally  a  duty  of  the  local 
governments,  and  in  the  United  States  the  first  taxes 
laid  in  the  colonies  were  for  this  purpose.  The  Fed- 
eral government  stopped  spending  much  for  roads 
and  canals  after  1840.  In  the  period  from  1789-1882 
the  total  expenditure  was  only  $  19, 966,465.  In  the 
year  1890  the  commonwealths  and  local  governments 
spent  $72,262,023  on  roads,  sewers,  ditches,  and 
bridges. 

The   maintenance  of  waterways,  roadsteads,  har- 
bours,   rivers,   canals,    is    also    a    public    function. 
Canals,  to  be   sure,  have   passed  or  are  Public  assi  t 
passing  through  the  same  development  ance  to  navi- 
as  roads,  and  in  some  respects  harbours  gai( 
and  rivers  have  also  done  so.1     In  the  United  States 
the  dredging  and  improvement  of  the  facilities  for 
navigation  in  rivers  and  harbours  are  the  only  im- 
portant items  of  "  internal  improvement  "  that  have 
been  consistently  held  in  the  hands  of  the  federal 
government.       From     1789-1882     Congress    spent 
8106,882,717  on  rivers  and  harbours,  and  in   1890, 
$11,737,438  were  spent  thereon.     In  the  same  line 
is  the  maintenance  of  light-houses,  signal-stations, 

1  Many  of  the  harbour  expenses  of  the  port  of  San  Erancisco  are 
treated  as  expenditure  conferring  a  special  benefit  on  ship-owners. 
But  there  is  a  movement  on  foot  to  throw  more  of  these  on  the 
general  revenues,  on  the  ground  that  they  confer  a  general  benefit. 
See  San  Francisco  daily  papers  November  9,  1895  ;  also  December 
20,  1895. 


48  INTRODUCTION  TO  PUBLIC  FINANCE        PARTI 

the  weather  bureau,  and  life-saving  stations.  The 
latter  is  in  some  countries  supported  by  private 
contributions;  in  the  United  States  it  costs  $1,250,- 
000.  The  construction  of  light-houses,  beacons, 
and  buoys  cost  from  1789-1882,  177,080,509.  In 
1894,  the  light-house  service  cost  the  United  States 
13,250,000. 

SEC.  6.  No  expenditure  commends  itself  more 
than  that  for  education.  It  creates  the  groundwork 
The  cost  of  of  all  political  institutions.  No  expen- 
education.  diture  in  the  opinion  of  Geffcken  is  more 
"  reproductive "  than  that  which  the  State  makes 
for  the  development  of  its  future  citizens.  But 
the  expenditure  of  the  various  countries  for  this 
purpose  cannot  very  well  be  compared,  because  it 
is  very  difficult  to  obtain  a  complete  statement  of 
all  the  outgo  under  this  head.  The  local  govern- 
ments generally  have  certain  lower  branches  under 
their  control  and  pay  a  part  or  the  whole  of  the 
expense  of  those.  In  federal  governments  the  re- 
mainder of  the  system  is  generally  under  the  control 
of  the  component  parts.  The  United  States  federal 
government  has  rendered  assistance  to  the  common- 
wealth and  local  schools  by  grants  of  land  of  un- 
known value,  and  by  the  collection  and  dissemination 
of  information  through  a  bureau  of  education,  and 
in  various  other  ways.  In  England  the  provision 
for  education  made  by  public  authorities  is  gener- 
ally less  than  in  most  other  countries,  the  sole  ex- 
ception being  the  provision  for  technical  education. 


CHAP,  ii    EXPENDITURE  FOR  COMMON  BENEFIT       49 

Until  very  recently  this  line  of  public  activity  has 
been  regarded  by  that  country  as  one  conferring  a 
special  benefit  and  to  be  paid  for  in  part  by  fees. 
But  it  is  now  pretty  clearly  the  accepted  policy  of 
all  modern  nations  to  provide  at  least  the  primary 
education  necessary  for  every  citizen  as  Elementary 
a  common  benefit  and  to  make  it  com-  education 

.    .  treated  as 

pulsory  and  free  to  all  the  recipients.  a  common 
In  treatment,  then,  it  is  as  much  a  benefit- 
benefit  for  the  rich  childless  man  that  the  sons 
of  his  poorer  neighbour  should  be  educated  as  that 
he  should  have  the  protection  of  the  police  in  the 
enjoyment  of  his  property,  and  he  is  made  to  pay 
on  that  principle.  In  regard  to  higher  education 
as  given  in  the  secondary  schools,  and  technical 
education,  there  is  no  such  uniformity  of  practice. 
Education  in  the  rudimentary  mechanical  arts  is 
in  fact  becoming  as  important  a  need  of  Technical 
society  as  elementary  education  in  the  education. 
usual  branches.  As  the  pace  of  industry  becomes 
more  rapid  and  its  organisation  more  perfect,  the 
possibility  of  giving  this  sort  of  instruction  by  the 
old  apprenticeship  system  vanishes.  There  is  no 
place  for  the  boy  in  the  modern  factory.  Private 
initiative  cannot  be  depended  upon  to  supply  the 
opportunity  for  this  sort  of  education.  The  State 
has  to  do  so  if  it  is  done  at  all.  In  this  respect 
many  of  the  English  cities  are  far  ahead  of  any 
American  city.1 

1  Shaw,  Municipal  Government  in  Great  Britain. 

£ 


50  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

Whether  University  education  should  be  given 
the  recipients  free  of  charge  at  the  common  cost  is, 
University  i*1  practice  also,  an  open  question.  Had 
education  not  no^  liberal  private  endowments  been 

yet  treated  as  ,       -         .  *,  .  . .     .  ,     -,  , 

a  common  made  tor  this  purpose,  it  is  probable 
benefit.  that  the  question  would  long  ago  have 

been  settled,  and  that  this  branch  of  education 
would  have  been  treated  as  the  primary  was.  Uni- 
versity education,  even  though  enjoyed  by  but  a 
relatively  small  number  of  the  citizens,  is  far  more 
"  reproductive  "  and  far  more  beneficial  to  the  State 
as  a  whole  than  even  a  widely  diffused  system  of 
primary  schools.  It  is  quite  as  important,  if  not 
more  important,  to  have  highly  trained  leaders  of 
public  action  and  thought  as  it  is  to  have  a  low 
degree  of  intelligence  widely  disseminated.  The 
University  as  a  centre  for  research  alone  is  worth 
many  times  what  it  costs.  In  proportion  to  the 
benefits  which  it  confers  on  the  State  it  is,  where 
run  at  the  general  cost,  the  least  expensive  part  of 
the  whole  system.  The  provision  made  by  many 
of  the  western  commonwealths  of  the  United  States 
for  the  liberal  endowments  of  Universities  from  the 
public  funds  has  been  without  exception  the  most 
beneficial  and  economical  expenditure  they  have 
made.  In  Germany,  too,  a  large  part  of  the  ex- 
pense is  borne  by  the  State.  Closely  related  to 
education  is  the  maintenance  of  museums,  libraries, 
picture  galleries,  and  scientific  investigations.  These 
comprise  in  most  countries  an  important  part  of  the 


CHAP,  ii    EXPENDITURE  FOR  COMMON  BENEFIT        51 

provision  for  education.  The  United  Kingdom 
spends  on  all  these  educational  works  £9,783,469 
from  the  general  treasury,  and  a  far  larger  amount 
from  other  sources.  In  the  United  States  in  1890 
the  total  public  expenditure  for  education  was 
$145,583,115,  which  was  by  far  the  largest  expen- 
diture for  any  one  purpose. 

SEC.  7.  Indirectly  all  public  expenditure  aids  pri- 
vate industry  and  commerce.  But  there  are  many 
forms  of  direct  aid,  that  are  treated  and 

Assistance  of 
regarded  as  conferring  a  common  bene-  industry  and 

fit  on  all  alike  although  accruing  to  the  commerce- 
good  of  certain  persons.  Bounties  are  sometimes 
offered  for  certain  products.  Enterprises  of  various 
kinds  receive  subventions.  The  so-called  protective 
system  involves  an  indirect  expenditure  of  the 
people's  money  in  the  same  way.  The  expense 
of  maintaining  the  currency,  of  building  and  keep- 
ing up  roads,  canals,  harbours,  and  the  like  is  of  the 
same  character.  So  are  many  public  buildings,  as 
exchanges,  markets,  slaughter-houses,  structures  and 
grounds  for  public  fairs  and  the  like,  and  commis- 
sions and  othej:  organisations  for  disseminating 
knowledge  concerning  horticulture,  agriculture,  and 
various  industries.  The  maintenance  of  a  system  of 
weights  and  measures,  also,  belongs  here.  Besides 
all  those  mentioned  and  some  others  which  are  gen- 
erally treated  as  expenditures  for  the  common  benefit, 
there  are  a  great  many  things  which  the  State  does 
for  the  benefit  and  assistance  of  industry  and  com- 


52  INTRODUCTION  TO  PUBLIC  FINANCE       PART 

merce  that  are  regarded  as  conferring  special  benefit 
and  treated  as  such. 

The  administrative  control  of  private  industry 
and  commerce  has  become  a  necessity  on  account 
Control  of  °^  ^e  growing  power  of  modern  organi- 
private  enter-  sations  of  capital.  The  necessity  has 
been  widely  felt  of  controlling  industrial 
monopolies,  and  we  have  numerous  commissions  for 
the  regulation  of  railroads  and  the  like.  To  this 
branch  of  expenditure  belongs  also  the  cost  of  the 
control  exercised  for  the  protection  of  the  public 
health  over  the  production  and  sale  of  foods.  This 
is  mainly  an  expenditure  of  the  local  governments, 
although  it  occasionally  enters  into  that  of  the 
central  government,  especially  in  the  case  of  im- 
ported foods.  The  cost  of  the  enforcement  of  sani- 
tary regulations  of  all  sorts  is  another  expenditure 
of  the  same  character. 


CHAP,  in       EXPENDITURE  FOR  INDIVIDUALS  53 


CHAPTER   Iir 

EXPENDITURE   FOB    THE    BENEFIT    OF    INDIVIDUALS 

SECTION  1.  In  this  chapter  we  shall  consider  the 
remaining  three  classes  of  expenditure.  These  are 
not  so  very  closely  akin,  but  have  one  point  of  simi- 
larity ;  namely,  that  they  are  all  for  the  particular 
benefit  of  individuals.  The  first,  however,  is  not  so 
treated  by  any  nation,  but  is  treated  as  though  it 
were  an  expenditure  for  the  benefit  of  all.  The 
relief  of  indigence  and  the  protection  charitable 
of  society  against  the  insane  and  the  expenditure. 
criminal,  the  care  of  the  feeble-minded  and  other- 
wise defective  classes,  and  the  care  of  the  sick  are 
among  the  most  costly  and  most  discouraging  feat- 
ures of  public  expenditure.  In  the  United  States 
the  expenditure  for  pensions,  charities,  and  gratui- 
ties amounted,  in  1890,  to  $146,895,671,  or  nearly 
a  million  dollars  more  than  that  for  educational  pur- 
poses and  the  common  schools.  Generally  even 
after  the  State  has  done  all  that  it  can  be  induced 
to  do  there  is  still  room  for  private  effort  in  the  same 
direction.  The  expenditure  by  private  persons  and 
societies  for  exactly  the  same  purposes  is  even  larger 
than  that  of  the  government.  So  that  this  is  un- 


54  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

doubt edly  the  heaviest  of  all  public  expenditures. 
The  relief  of  poverty  has  generally  received  more 
attention  in  treatises  on  Political  Economy  than 
in  works  on  Public  Finance.  But  it  belongs  very 
properly  to  the  latter  science.  It  is  generally  a 
local,  rather  than  a  national,  expenditure,  but  on 
account  of  its  vast  size  and  economic  importance  has 
often  received  the  attention  of  the  central  authorities, 
and  is  in  many  cases,  at  least  partly,  under  their 
control.  There  is  almost  no  expenditure  that  fails 
so  signally  to  accomplish  anything  like  permanent 
results.  As  frequently  administered,  poor  relief  has 
aggravated  the  very  evils  it  has  been  intended  to  re- 
lieve. The  words  of  Malthus  are  still  true :  "  We 
have  lavished  enormous  sums  on  the  poor,  which  we 
have  every  reason  to  believe  have  constantly  tended 
to  aggravate  their  misery."1  Yet  the  expenditure 
is  necessary,  indeed  imperative,  and  will  be  so  as 
long  as  the  present  sentiments  on  the  subject  pre- 
vail, unless  we  can  remove  the  causes.  That  this 
may  be  done  by  the  extension  of  educational  facili- 
ties, especially  technical  schools,  is  a  frequent  con- 
tention. The  student  of  finance  need  not  enter  into 
the  question  of  the  causes  nor  of  the  cure  of  poverty. 
Indigence  is  there,  and  the  State  has  assumed  the 
duty  of  relieving  it.  The  modern  methods  of  relief 
are  fast  coming  to  be  as  economical  and  efficient  as 
the  conditions  under  which  they  are  necessarily 
administered  admit.  Like  war,  this  is  a  form  of  ex- 
1  Essay,  p.  438. 


CHAP,  in       EXPENDITURE  FOR  INDIVIDUALS  55 

penditure  that  shows  little  tangible  result  that  can 
be  measured  in  terms  of  money. 

The  general  principle  applied  in  the  granting  of 
continued  assistance  to  the  poor  is  that  the  cause 
of  poverty  to  be  relieved  must  be  such  The  principles 


that  it  cannot  be  removed  by  the  candi-  ^verning  the 

granting  of 

dates  for  assistance.  In  other  cases,  only  assistance. 
temporary  assistance  is  rendered*  Those  who  can 
help  themselves  are  desired  to  do  so.  The  four 
agencies  which  really  work  together  toward  the 
same  end  are  the  civil,  the  ecclesiastical,  the 
associated,  and  the  individual.  These  should  all 
work  harmoniously  and  should  avoid  duplication  of 
work.  The  assisted  persons  should,  so  far  as  possi- 
ble, be  put  under  conditions  which  will  enable  them 
to  help  themselves  to  the  limited  extent  that  they 
are  able.  The  repression  of  vagrancy  and  the  pun- 
ishment of  wilful  paupers,  who  are  really  able  to 
support  themselves  but  unwilling  to  do  so,  is  left  to 
the  courts. 

Although  poor  relief  is  mainly  a  local  duty,  Great 
Britain  contributes  .£710,000  annually  from  the  cen- 
tral treasury  for  "non-effective  and  charitable  ser- 
vices "  ;  of  this  over  ,£500,000  are  for  pensions.  In 
the  United  States  in  1890  public  charities  alone  (not 
including  pensions)  cost  140,000,000  ;  but  this  sum 
does  not  include  the  value  of  provisions,  etc.,  raised 
on  the  poor-farms,  or  at  the  work-houses,  of  which 
no  accurate  estimate  can  be  formed. 

Very  different  from  the  older  sort  of  poor  relief 


56  INTRODUCTION  TO  PUBLIC  FINANCE       PART  I 

is  the  institution  of  old-age  pensions  on  the  insur- 
ance plan.  Such  institutions,  for  example,  as  the 
ins  ran  e  German,  for  compulsory  insurance  may 
against  old  be  made  self-supporting  and  in  time 
promise  to  relieve  the  State  of  a  part  of 
the  burden  of  poor  relief.  If  indigence  is  to  be  re- 
lieved by  the  State  at  all,  such  expenditure  must  be 
regarded  as  conferring  a  common  benefit  on  all. 

Modern  society  supports  the  insane  and  criminal 
classes  at  public  cost.  In  this  way  the  greatest 
insane  and  possible  saving  is  made.  Indeed,  the 
criminal  cost  need  not  be  nearly  as  great  as  it  is. 

classes  can  be  . 

made  self-sup-  To  a  large  extent  prisons  can  be  made 
porting.  self-supporting.  It  is  perfectly  feasible 

by  a  proper  division  of  the  field  between  the  differ- 
ent institutions  to  make  the  prisons,  insane  asylums, 
and  the  like  entirely  self-sustaining.  Hard  labour 
is  frequently  a  part  of  the  criminal's  sentence,  the 
less  violent  insane  can  be  made  to  work,  and  some- 
thing can  be  got,  by  proper  supervision,  from  the 
feeble-minded  and  the  paupers.  By  an  exchange  of 
products  between  the  different  institutions  the  neces- 
sary diversity  can  be  obtained.  There  is  little  excuse 
for  the  too  common  uselessness  of  the  labour  imposed  ; 
the  tread-mill  and  oakum-picking  of  our  older  prison 
discipline  ;  the  digging  of  unneeded  ditches  by  the 
insane,  etc.  Exchange  of  products,  too,  avoids  the 
danger  of  conflicts  with  the  labour  unions,  which  so 
often  arise  when  a  prison  attempts  to  make  a  product 
for  sale  in  the  open  market.  This  expenditure  is  very 


CHAP,  in       EXPENDITURE  FOR  INDIVIDUALS  57 

closely  related  to  the  one  for  the  maintenance  of  in- 
ternal peace  and  security.  The  burden  falls  mainly 
upon  the  finances  of  the  central  organ,  or,  in  a 
federal  State,  upon  those  of  the  component  common- 
wealths. The  policy  of  isolating  the  defective  classes, 
the  insane  and  criminal,  the  deaf  and  dumb,  the  feeble- 
minded, and  the  like  is  an  economy  for  society  as  a 
whole,  and  if  it  can  be  made  to  prevent  the  propa- 
gation of  these  weaknesses,  is  far-sighted. 

Hospitals  for  the  sick  are  imperative  needs  in  the 
case  of  infectious  diseases ;  they  are  great  blessings 

and  very  desirable  from  the  standpoint 
£  j-  •        n  ™  •     Hospitals. 

of  expediency  in  all  cases.  The  opposi- 
tion so  frequently  manifested  by  private  medical 
practitioners  to  public  hospitals  is  a  sufficient  proof 
of  their  economy.  Generally  this  is  a  local  ex- 
penditure. Certain  branches  of  the  government, 
like  the  military  and  the  naval,  have  generally 
found  it  necessary,  on  account  of  the  large  number 
of  persons  in  their  employ,  to  make  provision  by 
hospitals  for  the  care  of  their  own  sick.  The  main- 
tenance of  quarantine  stations  for  the  isolation  of 
persons  coming  from  infected  countries  or  districts 
is  a  national  affair.  Its  cost  may  at  times  rise  to 
a  considerable  amount.  But  there  is  no  question 
as  to  its  necessity  and  economy.  In  the  United 
States  there  are  arrangements  for  quarantine  be- 
tween the  different  States  partly  at  the  cost  of  the 
federal  government  and  partly  at  that  of  the  com- 
monwealths. 


58  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

SEC.  2.    Old-age  pensions  for  officials  whose  lives 

have  been  spent  in  the  public  service,  or  for  soldiers 

whose  health  has  suffered,  for  the  good 

Pensions. 

of  all,  are  but  the  proper  recognition  of 
those  services.  They  may  be  regarded  as  sums 
reserved  from  the  wages  from  year  to  year  and 
paid  over  in  this  form.  In  that  case  this  expendi- 
ture should  be  placed  under  class  one.  This  is 
the  case  with  most  of  the  pensions  in  England,  and 
there  they  are  generally,  correctly  classed  under  the 
expenditure  for  the  departments  to  which  the  men 
pensioned  belonged  before  they  retired.  But  when 
this  expenditure  becomes,  as  it  has  in  too  large 
measure  in  America,  a  means  of  reward  for  political 
services  rendered  to  candidates  for  public  office,  it 
cannot  be  placed  anywhere  but  in  class  two,  being 
then  an  expenditure  for  the  benefit  of  certain  persons 
considered  as  though  it  were  for  the  benefit  of  all. 
The  rapid  increase  of  expenditure  for  this  purpose 
in  the  United  States,  as  well  as  the  curious  features 
of  that  increase,  show  that  it  cannot  all  be  justified 
by  any  rule  of  economy.  In  this  country  only 
soldiers  are  pensioned.  Under  general  laws,  which 
require  only  that  there  shall  be  sufficient  proof  that 
the  applicant  is  entitled  to  a  pension,  all  those 
who  base  their  claims  on  inability  to  work  or  ex- 
cellent services  are  pensioned.  But  many  others 
are  pensioned  by  special  acts  of  Congress.  The 
amount  of  pensions  has  increased  since  the  Civil 
War,  rapidly,  but  irregularly.  The  following  table 


CHAP,  in       EXPENDITURE  FOR  INDIVIDUALS  59 

shows   the   highest   and  the  lowest  points  of  each 
fluctuation : 

1865  .        .        .  ....  .  $16,347,621 

1869  .        .        .  .  .        .  ;    .  28,476,621 

1871  .        .      -V  ..-  ."  •".  '    .  34,443,894 

1878  .        .        .  .  ....  27,137,019 

1880  ...  .    ,  .        »  .  56,777,174 

1883  .        .        .  ?     '  .        .  .  66,012,573 

1884  .....  .        .  .  55,429,228 

1889  .        ...        .        .,       .    87,624,779 

1890  .        .        .        .        .        *        .  106,493,890 

1893  .  .        .     .  i        .  .        .  158,155,342 

1894  .  .        .        .        .  Y      .  140,772,163 

1895  .  .        .        .        .  about  140,500,000 

1896  .  ....  "      141,581,5701 

Great  Britain  spends  .£535,454:,  on  "superannua- 
tions and  retired  allowances,"  but  special  pensions  for 
distinguished  services,  military  and  naval,  civil  and 
judicial,  amount  to  <£116,837,  and  some  others  are 
covered  by  the  supplies  for  the  different  departments. 

SEC.  3.  Under  this  class  belongs  also  that  expen- 
diture which  is  made  for  the  development  of  in- 
dustry by  bounties  and  the  protection  of  home 
industries  against  foreign  competition.  The  lat- 

1  There  are  still  nine  widows  of  soldiers  of  the  Revolutionary 
War  on  the  list  of  pensioners.  It  is  estimated  that  there  is  a 
possibility  that  some  of  these  may  survive  until  1916.  There  are 
45  survivors  and  4445  widows  of  soldiers  of  the  War  of  1812. 
From  Indian  wars  there  are  3104  survivors  and  3284  widows. 
From  the  Mexican  War  are  13,461  survivors  and  7686  widows  ;  all 
the  rest  are  attributable  to  the  Civil  War.  Widows  of  soldiers 
who  took  part  in  that  contest  may  still  be  on  the  pension  list  in 
the  year  2002.  —  World  Almanac,  1895. 


60  INTRODUCTION  TO  PUBLIC  FINANCE      PARTI 

ter  expenditure  differs  from  the  former  only  in 
that  the  sums  spent  do  not  pass  through  the  hands 
of  the  officers  of  the  treasury.  The  recipients  of 
this  assistance  collect  it  directly  from  the  contrib- 
Assistanceto  utors  in  the  shape  of  higher  prices  for 
industry  in  their  wares  than  would  otherwise  pre- 
bounties  and  vail.  With  the  economic  side  of  this 
"protection."  expenditure,  and  the  possibility  or  im- 
possibility of  adding  permanently  to  the  wealth 
of  a  nation  by  this  process,  we  have  nothing  to 
do.  But  as  many  important  nations,  all,  in  fact, 
except  England,  Norway,  Holland,  Belgium,  Swit- 
zerland, and  Denmark,  practise  this  form  of  ex- 
penditure, we  cannot  avoid  at  least  a  statement  of 
its  character.  The  revenues  derived  by  the  gov- 
ernment from  taxes  on  the  commodities  actually 
imported  will  be  considered  in  Part  II.  But  so 
far  as  any  actual  "  protection  "  is  afforded  the  home 
producer  it  is  an  item  of  expenditure.  In  effect 
it  is  practically  the  same  as  if  a  subsidy  or  bounty 
were  paid  out  of  taxes  collected  from  the  consumers 
of  the  goods  in  question,  to  the  producers.  This 
expenditure  is  made  not  so  much  in  the  hope  of 
increasing  the  total  wealth  of  the  nation  directly 
as  in  the  hope  of  obtaining  a  greater  diversity  of 
«.  . *  products,  so  that  in  the  end  the  effect 

jNot  begun  as     f 

a  permanent     will  be  to  increase  the  wealth,  indirectly, 

by   allowing   for   a   greater   division   of 

labour,    and    consequently    for    more    steady    and 

efficient     production.      This     policy    has    nowhere 


CHAP,  ill       EXPENDITURE  FOR  INDIVIDUALS  61 

been  begun  as  a  permanent  one,  but  one  of  its 
results  is  the  growth  of  powerful  vested  interests 
which  make  for  permanence.  Thus  bounties  are 
paid  directly  from  the  treasury,  or  protection  is 
afforded  to  industries  which  it  is  hoped  will  event- 
ually be  self-supporting  but  which  are  not  so  at 
the  time.  At  different  times  circumstances  have 
caused  this  policy  to  be  supported  by  different 
arguments.  Practically  all  the  most  important 
arguments  have  been  used  at  different  times  in  the 
United  States,  where  protection  has  prevailed  with 
scarcely  a  break  from  1816  to  1895  and  still  prevails 
in  large  measure.  The  oldest  of  those  arguments 
is  known  as  the  "  infant  industries  argu-  Arguments  by 
ment."  It  is  urged  that  new,  weak  in-  ™hichP™tec- 

tion  has  been 

dustries  cannot  hope  to  live  if  subject  supported. 
to  the  competition  of  older  foreign  industries.  At 
the  same  time  it  is  maintained  that  in  case  of  war  it 
would  be  practically  necessary  for  a  country  to  be 
able  to  supply  all  its  own  needs.  This  grows  directly 
into  the  argument  of  List,  which  is  in  the  main  to  the 
effect  that  a  nation's  prosperity,  in  general,  depends 
not  so  much  upon  the  mass  of  wealth  produced  as 
upon  the  greatest  possible  diversity  of  its  industries, 
so  as  to  develop  all  possible  phases  of  its  national 
production.  Just  as  the  human  body  is  healthier 
when  all  the  muscles  are  uniformly  developed,  than 
when  a  few  are  abnormally  strong,  so,  it  is  argued,  a 
nation  is  more  truly  prosperous  when  all  its  produc- 
tive forces  are  moderately  active  than  when  its  en- 


62  INTRODUCTION  TO  PUBLIC  FINANCE       PART  I 

tire  force  is  expended  in  a  few  lines.  Later  comes 
the  patriotic  or  "home  market"  argument,  which 
urges  that  the  home  producer  has  a  claim  on  the 
custom  of  the  home  consumer.  Finally  this  argu- 
ment develops  into  the  famous  "pauper  labour" 
argument,  and  it  is  maintained  that  the  home  pro- 
ducer has  been  enabled  to  pay  his  workmen  higher 
wages  than  the  same  classes  of  workmen  receive  in 
foreign  countries,  on  account  of  protection,  and  that 
to  remove  that  protection  would  be  to  reduce  the 
home  workmen  to  the  standard  of  life  of  the  for- 
eigners. This  latter  argument  is  largely  an  appeal 
to  class  interests  for  votes  and  is  not  quite  tenable. 
The  infant  industries  argument,  it  is  generally  ad- 
mitted, is  incontestable.  The  strongest  argument 
in  favour  of  the  continuance  of  this  subsidising  of 
industries  has  been  developed  from  that  of  List. 
This  may  be  restated  somewhat  as  follows :  if  the 
productive  energy  of  a  nation  has  but  a  few  outlets, 
as  in  exploiting  natural  advantages,  there  is  a  great 
danger  that  the  nation's  economic  life  may  become 
stagnant.  If,  however,  production  be  diversified, 
even  by  an  artificial  process,  it  is  much  easier  to 
keep  the  current  of  productive  energy  in  motion, 
allowing  it  to  be  turned  in  whatever  direction  new 
advantages  may  open  up. 

While  it  may  be  admitted  that  there  is  great  force 
in  these  arguments,  it  must  be  remembered  that 
protection  is  very  heavy  expenditure,  not  less  heavy 
because  it  is  hard  to  estimate  its  amount.  There 


CHAP,  in        EXPENDITURE   FOR  INDIVIDUALS  63 

is  a  practical  limit  set  to  the  possible  amount  of 
expenditure  in  this  direction  by  the  wealth  of  the 
people.  If  this  process  places  too  heavy  Protection  is 
a  burden  on  the  nation's  annual  wealth  a  heavy  ex- 
increment,  the  burden  will  not  be  borne,  peT( 
and  the  end  defeated.  That  is,  if  the  "protected" 
infant  industries  finally  outgrow  the  need  of  sub- 
sidies, and  fix  prices  by  competition,  the  drain  upon 
the  resources  of  the  country  ceases.  If  they  do  not, 
the  subsidising  process  may  continue  so  long  as  the 
general  mass  of  the  wealth  is  not  thereby  too  seri- 
ously curtailed.  A  nation  may  be  able  to  pay  for 
diversification  of  industries,  just  as  it  may  be  able 
to  pay  for  schools,  for  parks,  for  museums,  for  libra- 
ries, etc.  But  the  limit  of  such  expenditure  is  set 
by  what  the  nation  can  afford.  This  limit  is  too 
frequently  overlooked ;  it  is  too  often  forgotten  that 
all  protection  is  public  expenditure.  No  "protec- 
tion" is  afforded  unless  the  price  is  raised.  The 
difference  between  the  price  that  would  have  pre- 
vailed and  the  price  that  does  prevail  is  the  amount 
the  nation  spends  for  this  purpose.  This  is  not 
offset  by  any  gain  in  wealth,  and  can  only  be  justi- 
fied by  the  desirability  of  having  a  diversity  of  in- 
dustries. 

SEC.  4.  We  now  come  to  those  expenditures  that 
are  treated  as  conferring  a  benefit  divided  between 
the  particular  individual  who  pays  for  what  he  gets, 
and  the  people  as  a  whole  who  pay  in  the  general 
taxes  for  the  general  or  common  benefit.  The  first 


64  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

and  oldest  of  these  is  the  expenditure  for  the  courts. 
The  adjudication  of  disputes  between  different  per- 
Expenditure  sons  was  one  of  the  earliest  functions  of 
istrationof^  government.  The  payment  of  the  costs 
justice.  was  originally  thrown  upon  the  suitors. 

But  modern  governments  conceive  that  it  is  in  the 
common  interest  to  have  justice  universally  ad- 
ministered. Upon  the  general  and  accurate  admin- 
istration of  justice  depends  in  great  measure  the 
prosperity  of  business.  But  either  as  a  preven- 
tive of  too  frequent  litigations  or  on  account  of  the 
special  benefit  supposed  to  accrue  to  the  suitor,  the 
costs  are  divided,  and  one  part  paid  by  the  people, 
the  other  —  a  minor  part  —  by  the  suitor.  In  crim- 
inal cases  the  whole  cost,  practically,  falls  on  the 
State ;  in  civil  cases  the  attempt  is  generally  made 
to  assess  the  cost  upon  the  party  at  fault.  In  Eng- 
land, the  cost  of  the  judicial  system  is  £ 3,787,167. 
A  large  part  of  the  local  administration  of  justice 
is  rendered  without  emolument  by  the  Justices  of 
the  Peace.  The  United  States  federal  expenditure 
for  this  purpose  is  about  $7,000,000.  The  common- 
wealths, the  counties,  and  the  cities  spend  much  more, 
making  a  total  of  over  123,000,000.  Besides  the 
mere  deciding  of  disputes  and  of  criminal  cases,  the 
judicial  departments  perform  other  legal  functions  of 
importance,  as,  for  example,  the  probating  of  wills, 
the  disposing  of  property  of  intestates,  etc.  Some- 
what similar  legal  functions  are  performed  for  the 
special  benefit  of  the  individual  citizens  by  the 


CHAP,  in       EXPENDITURE  FOR  INDIVIDUALS  65 

administrative  branches  of  the  government,  as  reg- 
istration and  legalising  of  deeds,  mortgages,  mar- 
riages, and  other  contracts,  the  granting  and 
registration  of  copyrights,  trademarks,  patent  rights, 
corporation  rights,  etc. 

In  the  United  States  the  courts  have  developed 
a  number  of  legislative  and  administrative  functions 
of  great  importance.  As  the  interpreters  of  the 
federal  and  commonwealth  constitutions,  they  have 
had  to  meet  new  conditions,  and  indicate  the  bear- 
ing of  the  constitutions  thereon.  They  have  often 
been  called  upon  to  interpret  the  meaning  of  con- 
stitutional customs  that  have  grown  up  outside  of 
the  written  documents,  and  have  in  this  way  given 
those  customs  a  certain  degree  of  legal  prominence. 
They  were  formerly  in  some  of  the  commonwealths 
(following  an  old  English  custom)  allowed  to  deter- 
mine the  tax  levy  or  apportionment.  Quite  re- 
cently, by  the  use  of  injunctions,  they  have  exercised 
a  sort  of  administrative  control  over  industry,  es- 
pecially as  affects  the  relations  of  employers  and 
employees  in  industrial  monopolies  of  public  impor- 
tance, as  for  example  common  carriers.  In  the  con- 
trol of  municipal  corporations,  both  by  punishing 
illegal  acts  and  compelling  due  compliance  with  dis- 
cretionary duties,  they  have  largely  performed  the 
functions  exercised  by  the  administrative  depart- 
ments in  Europe.1  In  all  this  work  they  are  con- 
sidered as  acting  for  the  common  benefit. 
1  See  Goodnow,  Municipal  Home  Mule. 


66  INTRODUCTION  TO  PUBLIC  FINANCE       PARTI 

SEC.  5.  Other  functions  that  are  similarly  treated 
need  but  to  be  enumerated.  Among  them  are  the 
laying  out  and  grading  of  streets,  building  of  sewers 
for  the  benefit  of  all  the  citizens,  and  the  special 
Betterment  of  "  betterment "  of  the  property  of  abut- 
property,etc.  ting  landowners.  The  division  made 
here  is  generally  that  the  first  cost  is  assessed  to 
the  specially  benefited  persons,  the  subsequent 
costs,  maintenance,  etc.,  to  the  people.  The  supply 
of  water  is  similarly  treated  in  many  cities.  One  of 
the  best  examples  of  this  sort  of  expenditure  is  that 
of  the  post  office,  as  managed  in  the  United  States. 
This  service  is  almost,  but  not  quite,  entirely  treated 
as  conferring  a  special  benefit  on  the  users.  The 
cost  of  the  distribution  of  newspapers  within-  the 
county  in  which  they  are  published  is  treated  as 
a  public  benefit.  In  some  countries  the  post  office 
is  so  managed  as  to  yield  a  surplus,  in  which  case  it 
passes  into  class  four. 

SEC.  6.  Expenditures  of  class  four  are  part  of 
the  gross  expenditure  only.  When  a  State  spends 
money  in  wages  and  in  the  purchase  of  a  plant  and 
raw  materials  for  the  production  of  porcelain  and 
State  indus-  the  like,  it  expects  to  get  it  all  back 
trV'  again  from  the  sale  of  the  commodities. 

The  same  is  true  of  a  city  maintaining  a  gas  plant, 
of  a  State  railroad,  etc.  Originally,  the  State  made 
use  of  public  lands,  forests,  mines,  etc.,  as  a  source 
of  income,  but  now  there  are  a  great  many  indus- 
tries and  enterprises  which  the  State  conducts  more 


CHAP,  in       EXPENDITURE  FOR  INDIVIDUALS  67 

for  a  public  purpose  than  for  the  gain  to  the  public 
treasury.  A  city  does  not  operate  its  street  rail- 
ways primarily  as  a  source  of  income,  but  to  guar- 
antee the  citizen  good  and  cheap  service.  Hence 
the  gross  expenditure  for  this  purpose  is  a  very  im- 
portant item.  It  is  growing  to  be  more  and  more 
so  as  time  goes  on. 

Some  of  the  more  important  industries  that  the 
State  carries  on  are  for  the  purpose  of  supplying 
itself  with  certain  commodities,  as  arms,  Manufacture 
ammunition,   war-ships,    and    the    like,   of  supplies. 
Such   industries   are   carried   on   from   the    highest 
branches  of  the  government  down  to   the   lowest. 
We  find,  for  example,  many  American  towns  sup- 
plying a  part  of  the  support  of  the  inmates  of  its 
public   institutions  by  cultivating  the  lands  of  the 
poor  farms. 

Some  of  the  most  striking  instances  of  such  in- 
dustrial expenditure  are  connected  with  communi- 
cation and  transport,  and  with  those  industries  the 
management  of  which,  on  account  of  the  tendency 
to  monopoly,  is  frequently  put  into  public  hands. 
Examples  of  this  are  numerous  among  those  already 
mentioned.  Many  industries  have  been  at  different 
times  and  places  so  managed  as  to  cost  more  than 
they  brought  in.  That  is,  they  have  resulted  in  a 
net  deficit,  not  a  net  profit.  They  thus  pass  into 
class  three. 

A  rather  significant  list  of  enterprises  has  in 
modern  times  been  entered  upon  by  the  State,  which 


68  INTRODUCTION  TO  PUBLIC  FINANCE        PART  I 

might  be,  but  are  not,  managed  so  as  to  yield  a 
revenue  that  offsets  their  cost.  These  are  museums, 
libraries,  parks,  baths,  and  the  like.  They  belong 
under  class  one. 


PART   II 

PUBLIC  REVENUES 
CHAPTER   I 

THE   CHARACTER    AND     CLASSIFICATION    OF    PUBLIC 
REVENUES 

SECTION   1.    German  writers   on   Public  Finance 
generally  begin  the  discussion  of  revenues  with  the 
statement  that  the  State  requires  services   The  state  re- 
and  commodities.     The  services  are  fur-  *ui™s  se™ic™ 

and  commoai~ 

nished  by  the  citizens  ;  at  first  by  all  in  ties. 
virtue  of  membership  in  the  State,  later  by  particu- 
lar ones,  who  are  paid  for  them.  The  commodities 
or  wealth  required  may  be  produced  by  the  State 
or  taken  from  the  citizens.  In  the  ancient  primitive 
community,  services  are  rendered  by  the  citizens  as 
their  proper  contribution  to  the  State.  The  com- 
modities needed  are  for  the  most  part  furnished  by 
the  individuals  without  any  recognition  of  a  transfer 
of  ownership  to  the  State.  The  division  of  labour 
necessary  for  the  successful  administration  of  more 
complex  affairs  of  the  State  demands  a  separation 


70  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

of  the  persons  permanently  in  the  service  of  the 
State  from  the  other  classes.  These  must  then  be 
supported  from  somewhere,  and  in  classical  times 
this  is  accomplished  by  giving  the  State,  or  what 
is  the  same  thing  in  classic  thought,  its  special 
officers,  the  income  from  certain  sources,  as  mines,  or 
productive  enterprises,  and  taxes  upon  tributary  peo- 
ples, or  certain  inferior  classes  of  citizens.  Out  of 
these  funds  the  public  officers  were  supported,  and 
those  paid  in  the  service  of  the  State  for  the  exercise 
of  its  functions  were  maintained. 

Again,  in  the  middle  ages,  feudalism  furnished  a 
mode  of  support  for  public  officers  by  giving  them  a 
certain  control  over  land  and  its  occupants,  a  means 
which,  without  the  use  of  money,  provided  services 
Feudalism  anc^  commoclities  f°r  ^ne  public  needs. 
provides  for  But  later  as  money  became  more  plentiful, 

l^he  Ittatewith  an(^  *n  orc^nary  transactions  payments  in 
out  the  use  of  kind  and  in  services  were  commuted  into 
payments  in  money,  the  government  in 
turn  commuted  services  due  into  money  payments. 
At  the  same  time,  lands,  originally  conveyed  to  pub- 
lic officers  in  consideration  of  their  public  services, 
and  to  enable  them  to  perform  those  services,  passed 
absolutely  into  their  control  and  were  treated,  in 
part  at  least,  as  their  private  property,  and  the  ser- 
vices and  commodities  they  yielded  became  the 
private  income  of  these  individuals  and  their  fami- 
lies. But  although  the  revenues  from  the  domains, 
retained  in  this  same  way  by  those  families,  which 


CHAP.  I     CLASSIFICATION  OF  PUBLIC  REVENUES        71 

became  the  sovereigns,  were  still  applied  to  public 
expenses,  they  soon  became  insufficient,  as  the  State's 
functions  grew,  and  other  resources  were  sought. 
In  the  mad  scramble  for  public  revenues,  old  rights 
to  dues  and  services  were  tenaciously  retained  by 
rulers  or  their  officers.  Especially  were  the  claims 
to  military  and  similar  general  services  held.  These 
claims,  too,  were  finally  commuted  into  money  pay- 
ments, which  became  compulsory  just  as  the  services 
from  which  they  were  derived  had  been  compulsory. 

The  names  used  for  the  first  revenues,  which  ex- 
ceeded the  receipts  from  domains  and  the  customary 
services,  show  very  distinctly  the  volun-   The  voluntar 
tary  character  of  the  payments.     They  character  of 
are  called  beggings,  requests,  gifts  (bed**,  £££** 
petitiones,  benevolences,  dona),  or  from  the  receipts  from 
point  of  view  of  the  assistance  given,  aids  domaww- 
(aide,   steuer).     With   the   gradual   growth  of   the 
needs,  for  which  these  demands  were  made,  into  per- 
manent needs,  with  the  further  centralisation  and 
concentration  of  the  public  functions,  the  neglect  of 
public  duties  by  the  feudal  lords,  and  quasi-public 
officers  quartered  on  the  land,  and  with  the  conse- 
quent performance  of  these  duties  by  the  government, 
the  demands  upon  the  people  became  permanent  and 
compulsory. 

SEC.  2.  Since  the  emergence  of  the  monarchical 
State  from  feudalism  the  trend  of  affairs  has  been 
directed  by  the  growth  of  constitutionalism,  —  or 
the  representation  of  the  people  in  the  govern- 


72  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

ment.  As  the  whole  advance  of  this  movement 
turned  upon  the  success  of  the  people  in  obtaining 
The  growth  of  tne  control  of  the  purse,  it  is  evident 
constitution-  that  the  resulting  changes  in  the  financial 

alism  results 

in  uniformity  system  must  have  been  very  important. 
in  the  revenue  xhe  long  history  through  which  the  dif- 

systems  of  the 

different  coun-  ferent  revenues  have  passed,  the  neces- 
tries.  sity  of  constant  compromise  between  the 

different  interested  parties,  and  the  various  changes 
made  necessary  by  the  growth  in  the  economic  life 
of  the  world,  all  these  have  left  modern  States 
with  a  most  confused  jumble  of  revenues.  Yet 
with  all  the  irregularities  and  anomalies  that  can 
be  found  in  the  revenues  of  any  modern  State, 
there  is  still  in  every  case  a  more  or  less  clearly 
traceable  systematic  development.  This  growth  of 
system  is  clearly  due  to  the  work  of  the  represen- 
tatives, in  whose  hands  the  development  of  con- 
stitutional government  finally  placed  the  control  of 
the  collection  and  spending  of  the  public  money. 
As  these  representatives  realised  the  need  of  reve- 
nues, they  naturally  sought  for  some  principles  of 
right  and  justice  to  guide  them  in  the  choice  of 
sources.  The  result  has  been  a  partial  uniformity 
in  the  systems  of  the  different  countries. 

It  should  not,  however,  be  imagined  that  this 
uniformity  is  very  great,  nor  that  the  systems  of  the 
different  countries  are  alike  in  details.  But  some- 
what the  same  fundamental  ideas  seem  to  underlie 
all.  There  are  also  great  differences.  Thus  one 


CHAP,  i     CLASSIFICATION  OF  PUBLIC  REVENUES        73 

country  chooses  to  obtain  the  larger  part  of  its 
revenues  from  a  tax  not  used  at  all  in  another. 
Historical  practices  and  differences  in  C7.  . 

Slight  differ- 

the    frame    of    government    necessitate  ences  in  de- 
modifications  even  of  the  same  principle.    * 
That  bugbear   of  the   student  of   Public   Finance, 
practical  expediency,  which  has  ruined  many  a  fine 
theory,  works  in  the  most  astonishing  ways  to  pre- 
vent the  execution  of  approved  principles. 

SEC.  3.  The  uniformity  above  noted  came  about 
as  a  natural  result  of  the  general  search  by  the 
agents  of  constitutional  government  for  some  good 
reason  why,  in  each  case,  the  particular  person  con- 
tributing should  be  called  upon  to  do  so.  As  the 
representatives  of  the  people,  they  naturally  had  to 
satisfy,  in  some  way,  the  reasonable  desire  of  the 
people  for  some  clearly  defined  method  of  appor- 
tionment. As  it  is  generally  hard  enough  to  con- 
vince men  of  the  need  of  contributing  anything, 
the  plea  put  forth  must  be  a  strong  one.  If  we 
confine  our  attention,  for  the  purposes  of  illustra- 
tion, to  taxes  alone,  which  are  the  hardest  of  all 
revenues  to  justify,  we  can  see  more  clearly  how  the 
necessity  of  thus  showing  good  reasons  Different 
led  to  uniformity.  It  is  evident  that  if 
the  representatives  had,  for  instance,  in-  tion  of  taxes. 
formed  their  constituents  that  "taxes  are  one-sided 
transfers  of  economic  goods  or  services  " 1  they  would 
have  had  considerable  difficulty  in  getting  consent 
1  Part  of  the  definition  of  taxes  by  Professor  Ely,  pp.  6,  7. 


74  INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

to  any  taxes.  But  when  they  announced,  "taxes 
are  paid  in  return  for  the  benefits  conferred  upon 
you  by  the  government,"  it  was  easier  to  collect 
them.  When  they  proceeded  to  assess  taxes  on  the 
basis  of  a  more  or  less  definite  attempt  to  measure  the 
benefit  conferred,  or  where,  in  the  nature  of  things, 
an  actual  measurement  was  impossible  on  some  other 
basis  of  supposed  equality,  they  clearly  had  a  very 
good  case  to  present  to  their  constituents.  It  re- 
quires but  the  slightest  knowledge  of  the  history 
of  constitutional  legislative  bodies  to  prove  conclu- 
sively that  such  was  the  process  of  reasoning.  And 
this  fully  accounts  for  the  similarity  of  the  systems 
of  various  countries. 

Whenever  it  was  perfectly  clear  that  a  certain 
function  conferred  a  special  benefit  on  an  individ- 
ual citizen  the  charge  was  made  on  him,  and  those 
persons  not  so  clearly  benefited  were  wholly  or  par- 
tially exempt.  Thus  we  have  the  practice  of  tolls 
from  persons  using  the  roads,  of  fees  from  the  suitors 
at  court,  or  the  sale  of  some  privilege  or  com- 
modity to  the  citizens  for  a  price,  as  in  the  case  of 
granting  a  monopoly,  or  the  sale  of  manufactured 
wares,  or  of  lumber,  or  ore  from  the  domains.  But 
many  of  the  more  important  functions  do  not  result 
so  clearly  in  a  special  benefit  to  the  individual,  and 
recourse  is  had  to  some  other  mode  of  justification. 
At  first,  naturally,  the  older  ideas  are  developed. 
The  services  traditionally  due  from  the  citizen  to  the 
State,  of  which  that  of  military  service  is  the  most 


CHAP.  I     CLASSIFICATION  OF  PUBLIC  REVENUES   .     75 

prominent  example,  are  recalled  and  appealed  to.  It 
is  claimed  that  money  should  be  given  in  commu- 
tation of  these  services.  Then  the  ground  is  shifted 
again  and  again,  and  many  apparently  different 
reasons  are  advanced.  But  in  all  these  changes  one 
thing  is  clear,  —  the  shifting  of  argument  is  made  in 
order  to  enable  the  use  of  some  new  meas-  ,„ 

Changes  in 

ure  of  the  amount  of  taxation,  and   at  the  forms  of 


basis  the  justification  remains  practically 
the  same.    The  citizen  is  asked  to  pay,  search  for  new 
because  he  shares  in  the  benefits  common  measures- 
to  him  and  his  fellows.     But  this  common  benefit 
does  not  suggest  any  particular  measure. 

SEC.  4.    Another  point  of  similarity  between  dif- 
ferent nations  must  be  studied  historically  ;  that  is 

the  feature  of  compulsion.     This  feature   n 

Compulsion  is 

is  old  and  universal.  It  is,  perhaps,  older  a  universal 
than  any  one  of  the  nations  and  began  in  feature-  . 
that  feudal  system  from  which  they  emerged.  The 
citizen  had  to  be  compelled  to  render  his  service  to 
the  State,  whenever  the  special  benefit  to  him  was 
not  clear.  That  feature  the  most  advanced  consti- 
tutional governments  have  retained.  There  have,  to 
be  sure,  been  instances  where  States,  and  especially 
cities,  have  had  recourse  to  voluntary  contributions 
to  meet  the  expenses  giving  a  special  benefit.  But 
these  soon  passed  into  compulsory.  A  fine  example 
of  the  development  of  a  voluntary  contribution  into 
a  tax  is  found  in  the  English  poor-rate.  In  the 
twenty-seventh  year  of  the  reign  of  Henry  VIII., 


76  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

1536,  collections  were  made  for  the  impotent  poor 
(voluntary).  In  the  first  Edward  VI.,  1547,  bishops 
were  authorised  to  prosecute  all  who  refused  to  con- 
tribute for  this  purpose  (compulsion  enters).  In  the 
fifth  Elizabeth,  1563,  the  Justices  of  the  Peace  were 
made  judges  of  what  constituted  a  reasonable  contri- 
bution (compulsion  as  to  the  amount).  And  from 
the  fourteenth  Elizabeth,  1572,  regular  compulsory 
contributions  were  levied.  So  they  have  continued. 
SEC.  5.  We  have  already  classified  expenditures 
according  to  the  character  of  the  benefit  conferred.1 
Now  the  almost  uniform  practice  is  to 

Classification 

of  revenues       collect  compulsory  revenues  from  all  the 


according  as     citizens  for  those  expenditures  that 

^ey  are  justi-    „  .  _  j  . 

fied  by  com-      *er  a  common  benefit,  or  one  that  is  so 
mon  or  special  treated;  then  to  collect  special  compul- 

benefit. 

sory  revenues  for  a  part  of  the  cost  from 
those  persons  regarded  as  specially  benefited  by  ex- 
penditures of  class  three  ;  while  the  revenues  for 
meeting  the  fourth  class  of  expenditures  are  raised 
by  the  sale  of  the  commodities  or  services. 

Professor  Seligman  finds  that  there  are  three  dis- 
tinct classes  of  revenues,  each  resting  on  a  different 
justification.2  The  first  of  these  three  we  will  call 

1  See  Part  I.,  Chap.  I.,  sec.  6. 

2  See  Seligman,  "Classification  of  Revenues,"  in  the  Quarterly 
Journal  of  Economics,  April,  1893,  and  April,  1895  ;  Essays,  Chap. 
IX.     In  my  opinion  Professor  Seligman  has  not  improved  his  clas- 
sification by  the  refinements  introduced  in  the  second  article.     Nor 
is  the  necessity  for  distinguishing  between  fees  and  special  assess- 
ments clear.    Special  assessments  are  a  kind  of  fee,  even  within 


CHAP,  i     CLASSIFICATION  OF  PUBLIC  REVENUES       77 

taxes.  This  is  a  slightly  narrowed  use  of  the  term. 
In  the  broadest  sense  an  exercise  of  the  taxing  power 
of  the  State  occurs  whenever  a  compulsory  contribu- 
tion of  wealth  is  taken  from  a  person,  private  or 
corporate,  under  the  authority  of  the  public  powers. 
But  such  a  broad  definition  of  taxes  would  include, 
also,  the  charges  for  expenditures  of  the  third  class, 
levied  to  pay  the  cost  or  part  of  the  cost  of  a 
special  service.  As  these  are  certainly  different  from 
those  charges  levied  to  meet  the  expenditures  con- 
ferring a  common  benefit,  it  is  necessary  to  adopt 
the  narrower  definition.  In  this  sense  then  taxes 
are  general  compulsory  contributions 

.  HA.     i      •    j  Taxes  defined. 

of    wealth    levied   upon    persons,    natu- 
ral or  corporate,  to  defray  the   expenses   incurred 
in  conferring  a  common  benefit  upon  the  residents 
of  the  State.     A  tax  is  justified,  but  not  necessarily 
measured,  by  the  common  benefit  conferred. 

When  a  distinct  attempt  is  made  to  levy  the 
charge  only  where  a  traceable  or  assumed  special 
benefit  is  conferred,  and  to  make  it  cover  the  cost, 
or  a  part  of  the  cost,  thereof,  the  compulsory  pay- 
ment is  a  fee.  In  the  broadest  sense  fees  are  taxes, 
but  they  are  not  taxes  in  the  narrower  sense  defined 
above,  and  compose  a  large  and  important  class  by 
themselves.  A  fee  has  a  different  justification  from 

the  terms  of  the  Professor's  definition  of  fees.  Nothing  is  gained 
by  raising  classes  logically  secondary  in  character  to  first  place. 
It  is  sincerely  hoped  that  the  simple  general  outlines  of  Professor 
Seligman's  classification,  as  given  in  the  text,  may  find  general 
acceptance. 


T8  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

a  tax.  A  fee  never  exceeds  the  cost  of  the  special 
service  rendered.  A  charge  for  a  special  benefit 
that  exceeds  the  cost  is  best  regarded  as  consisting 
of  two  parts,  one  a  fee,  the  other  a  special  tax.  A 
fee  may  be  defined  as  a  compulsory  contribution  of 
wealth  made  by  a  person,  natural  or  cor- 

Fees  defined.  • 

porate,  under  the  authority  of  the  public 
powers  to  defray  a  part  or  all  of  the  expenses  in- 
volved in  some  action  of  the  government,  which, 
while  creating  a  common  benefit,  also  confers  a 
special  benefit,  or  one  that  is  arbitrarily  so  regarded. 
The  third  category  of  revenues  is  called  by  Pro- 
fessor Seligman  prices.  The  price  of  the  commodi- 
ties or  services  made  or  rendered  by  the  government 
differs  in  no  essential  particular  from  the  price  paid 

for  similar  commodities  or  services  ren- 

Prices  defined.  .  .        . 

dered  by  individuals.  The  price  is  the 
value  of  these  commodities  expressed  in  terms  of 
money.  If  the  State  has  a  monopoly,  it  may  act 
as  a  private  person  would  and  take  "  all  the  traffic 
will  bear,"  or  it  may  forego  a  part  of  the  possible 
gain,  and  the  payment  becomes  or  approaches  a  fee. 
If  the  State  has  no  monopoly,  it  must,  perforce,  act  as 
an  individual  would,  subject  to  competition.  Every 
civilised  country  has  these  three  categories  of  reve- 
nues, and  combinations  thereof,  and  no  more  than 
these.  Every  civilised  country  recognises  the  same 
justification  for  each  contribution.  Every  govern- 
ment appeals  to  the  same  motives  to  induce  the  pay- 
ment of  each  class.  In  the  case  of  the  first  two 


CHAP.  I     CLASSIFICATION  OF  PUBLIC  REVENUES       79 

classes  the  motive  is  compulsion,  in  the  last  the 
government  withdraws  and  allows  the  interest  of  the 
individual  to  bring  him  forward  and  induce  him  to 
make  the  contribution.  This  class  has  been  called 
voluntary.  If  this  term  meant  merely  the  absence 
of  compulsion,  the  spontaneity  as  it  were  of  the  con- 
tribution, it  would  be  satisfactory.  But  generally 
there  is  the  danger  of  confusion  arising  from  the 
implication  in  the  term  that  the  contribution  is  with- 
out return,  of  the  nature  of  a  gift.  Hence,  in  order 
to  show  the  character  of  the  payment,  Professor 
Seligman  has  called  it  contractual.  Prices  may  be 
There  are  serious  obiections  to  this  term  ™lle?  co,n~ 

J  tractual  reve- 

also,  although  it  is  of  such  a  character  nues. 
as  to  admit  of  a  technical  application  very  easily. 
But  in  lieu  of  a  better  and  for  sake  of  uniformity 
we  will  adopt  it. 

SEC.  6.  Thus  far,  for  sake  of  simplicity,  and  not  to 
depart  from  the  usage  of  other  writers,  we  have  con- 
sidered the  revenues  as  practically  identical  with  the 
money  flowing  into  the  treasury.  Services  rendered 
without  pay  do  not  belong  to  our  subject,  compulsory 
But  still  it  is  not  quite  accurate  to  iden-  revenues  are 

derivative; 

tify  the  public  revenues  with  the  money  contractual 
that  flows  into  the  treasury.     Money  is  arenot- 
here,  as  in  private  households,  but  the  representative 
of  wealth.     When  the  government  compels  its  sub- 
jects to  pay  contributions  of   classes  one  and  two, 
taxes  and  fees,  it  does  so  in  order  to  obtain  control 
of  wealth  which  it  takes  from  the  people  to  consume 


80  INTRODUCTION  TO  PUBLIC  FINANCE      PART  ii 

for  a  public  purpose.  But  in  the  case  of  contractual 
revenues  the  matter  is  quite  different.  Here  the 
government  simply  sells,  for  money,  wealth:  material 
things,  privileges,  or  services  which  it  has  brought 
into  existence.  The  transaction  is  a  simple  sale. 
This  is  partly  true  of  some  fees.  The  money  that 
flows  into  the  treasury  simply  takes  the  place  of 
actual  wealth  already  created  or  being  created  by 
the  government.  The  important  thing  to  note  is 
that  prices  result  in  little  or  no  increase  in  the 
amount  of  wealth  in  the  hands  of  the  government, 
unlike  the  other  cases,  but  a  mere  change  in  the  form 
of  the  wealth  already  ownedo  It  is  not  wealth 
taken  from  the  people  to  be  consumed  by  the  govern- 
ment; but  wealth  created  by  the  government  is 
turned  into  money  so  that  it  may  be  more  con- 
veniently consumed.  Nothing  is  taken  from  the 
people  at  all,  for  they  receive  back  the  equivalent 
of  their  money  in  wealth,  over  which  they  then  have 
control  as  owners.  In  the  case  of  compulsory  rev- 
enues the  matter  is  different  because 

Compulsory 

revenues  leave  they  receive  back  nothing  tangible,  but 

the  individual    gimply    enjoy     the     common     or     special 
in  the  same  J   J 

position  as       benefits   of    good    government.      These 
though  he  had  benefits   are  of   the  same  character  ex- 

consumed  his 

wealth.    Con-  actly   as   the   benefits   which   accrue   to 
the    indi^idual   when   he   consumes   his 


change  in         own  wealth.     They  are  "reproductive," 
form.  ^    aj.   a^^  ^n   j/ke   same   sense   that  the 

consumption    of    bread    by    the    worker    is    repro- 


CHAP,  i     CLASSIFICATION  OF  PUBLIC  REVENUES       81 

ductive.  That  is  in  no  sense  at  all.  Just  as 
the  aim  of  all  production  in  the  economic  world 
is  consumption  or  the  satisfaction  of  wants,  so  the 
end  and  aim  of  the  compulsory  collection  of  rev- 
enues is  consumption  by  the  State.  Sometimes,  to 
be  sure,  the  government  turns  these  funds  into 
permanent  forms  of  wealth  which  are  slowly  con- 
sumed; as,  for  example,  roads.  Sometimes,  too, 
the  government  adds  to  the  effective  power  of  the 
wealth  before  consuming  it,  or  uses  it  to  produce 
new  wealth;  but  yet  so  far  as  the  individual  is  con- 
cerned, he  has  parted  with  his  property  in  a  way 
which  leaves  him  benefited,  to  be  sure,  but  in  ex- 
actly the  same  position  as  when  he  spends  the  same 
amount  for  some  gratification.  Quite  the  contrary 
is  his  position  when  he  buys  a  piece  of  china  made 
by  the  government,  for  then  he  has  the  equivalent 
of  his  money.  The  government,  too,  is  no  richer 
than  before,  but  has  its  wealth  in  a  form  which 
better  suits  it.1  Frequently  the  government  uses 
the  wealth  created  directly  without  first  turning  it 
into  money.  This  wealth  is  as  much  a  part  of 
the  revenues  as  any  that  is  sold. 

We  may  now  change  our  terminology  slightly, 
and  say  that  there  are  three  sources  of  public  rev- 
enues :  the  first  is  collected  from  all  the  citizens 
by  compulsion,  on  the  ground  that  certain  expen- 
ditures are  necessary  and  confer  a  common  benefit 
upon  all ;  these  are  taxes.  The  second  is  collected 
1  Cf .  Stein,  Finanzwissenschaft,  II.,  138. 


82  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

by  compulsion  from  certain  persons  on  the  ground 
that  they  are  specially  benefited  by  some  expendi- 
tures ;  these  are  fees.  And  lastly,  the  State  creates 
wealth  for  itself.  The  wealth  thus  created  consti- 
tutes a  part  of  the  revenue  of  the  government  be- 
longing to  the  third  class.  This,  whether  sold  or 
not,  is  contractual  revenue. 

SEC.  7.    One  or  two  minor  matters  have  to  be  no- 
ticed and  our  classification  is  complete.     Sometimes 
States  receive  gifts,  generally  for  some 

Other  kinds  of  .   ,  „, 

revenues,  special  purpose.  These  are  now  rare  and 
gifts,  rever-  unimportant.  The  special  purpose  is 

sions,  by  emi-  ,--1,1 

nent  domain,  usually  more  or  less  outside  the  general 
fines,  andpen-  functions  of  the  State.  Sometimes  the 
State  receives  property  by  reversion,  or 
takes  property  which  has  no  apparent  owner.  This, 
too,  is  an  insignificant  category.  The  State  may 
exercise  the  right  of  eminent  domain  and  take  prop- 
erty for  some  purpose.  Generally  speaking,  it  re- 
stores an  equal  amount  of  some  other  kind  of  wealths 
so  this  transaction  results  in  no  net  revenue.  The 
State  is  the  recipient  of  not  insignificant  sums  from 
fines  and  penalties  inflicted  under  the  penal  power. 
These  are  compulsory  contributions  levied  with  an 
intent  to  injure,  and  differ  materially  from  the  other 
categories.  Their  nature  is  clear,  and  they  will  re- 
ceive no  further  attention.  All  the  receipts  of  the 
State  come  under  one  or  the  other  of  these  cate- 
gories. 


CHAP.  II     C LA  SSI  PICA  TION  OF  TAXES  AND  FEES         83 


CHAPTER  II 

THE  CLASSIFICATION   OF    TAXES   AND   FEES; 
DEFINITIONS 

SECTION  1.    Considerable    confusion    in   the    dis- 
cussions of  the  different  modes  of  taxation  is  due 
to   the  failure   to    distinguish   clearly   between   the 
justification  of  taxation  in  general  (i.e.    The  measure 
why  there  should  be  any  taxes  at  all),  of  taxation 

distinguished 

and  the  measure  01  taxation  (i.e.  what  from  the  justi- 
should  be  the  basis  upon  which  to  de-  flcation' 
cide  how  much  each  citizen  should  pay).  The  uni- 
versally accepted  justification  of  taxation  is  the 
common  benefit  conferred  upon  the  individuals  by 
the  action  of  the  government.  But  the  common 
benefit  is,  strictly  speaking,  equal,  while  the  taxed 
citizens  are  unequal  in  wealth.  Therefore  re- 
course has  to  be  had  to  some  other  measure  of 
taxation.  -  It  lay  nearest,  in  the  search  for  such  a 
measure,  to  assume  that  there  was  a  difference  in 
the  benefit  enjoyed  by  the  different  citizens.  Thus 
one  theory  assumes  that  protection  to  life,  liberty, 
and  property  is  the  chief  benefit  con-  The  benefit 
ferred,  and  that  this  benefit,  or  at  all  theory- 
events  its  cost,  varies  as  the  property  varies,  gener- 
ally in  exactly  the  same  proportion.  This  theory 


84  INTRODUCTION  TO  PUBLIC  FINANCE       PART  n 

has  been  called  the  benefit  theory  of  taxation,  be- 
cause it  attempts  to  estimate  by  the  benefit  con- 
ferred the  amount  of  tax  each  individual  should  pay. 
The  difficulties  involved  in  measuring  benefit, 
with  sufficient  accuracy  to  serve  as  a  basis  for  taxa- 
tion, led  another  school  of  thinkers  to  abandon  that 
entirely.  These  writers  felt  that  each  citizen  was 
necessarily  a  part  of  the  organism  of  the  State,  one 
of  the  nourishing  cells  as  it  were.  And  as  in  all 
organisms  of  nature  each  organ  or  each  cell  con- 
tributes to  the  life  of  the  whole,  in  accordance  with 
its  powers  or  strength,  so  each  citizen  should  con- 
tribute as  he  is  able.  They  claim  that  it  is  easier  to 
measure  ability  than  it  is  to  measure  benefit.  This 
The  faculty  theory  is  called  the  faculty  theory,  the 
theory.  term  "faculty"  having  been  found  in 

this  sense  in  early  tax  laws.  Generally  speaking, 
this  ability  is  supposed  to  be  indicated  in  some  way 
by  wealth.  But  the  advocates  of  faculty  as  a  meas- 
ure of  taxation  encounter  a  serious  difficulty  in  at- 
tempting to  ascertain  whether  faculty  is  proportional 
to  wealth  or  increases  more  rapidly  as  wealth  in- 
creases. A  negative  side  of  the  same  idea  is  pre- 
sented when  it  is  claimed  that  the  tax  should 
impose  an  equal  sacrifice  upon  every  citizen.  In 
determining  what  constitutes  equal  sacrifice,  we 
encounter  the  same  difficulty  as  in  determining 
how  to  measure  ability.1 

1  See  Chap.  III.  for  further  discussion  of  this  point.  A  full  and 
instructive  discussion  of  these  theories  is  to  be  found  in  Seligman's 
Progressive  Taxation  in  Theory  and  Practice. 


CHAP.  II     CLASS/PICA  TION  OF  TAXES  AND  FEES         85 

SEC.  2.  It  will  be  noticed  that  the  basis  from 
which  each  of  these  measures  starts  is  wealth.  The 
first  argues  that  benefit  is  indicated  by  wealth,  the 
second  that  faculty  is  so  indicated.  If  Difficulties  in 
wealth  is  the  basis,  then  the  classifica-  ^hewayof 

, .  .  .    ,  ,    ,  ,  ,  ,    finding  a  nat- 

tion  of  taxes  might.be  made  to  depend  uraidassijica- 
on  that  of  wealth.  Such  a  method,  tion  of  taxes. 
although  tried,  has  been  found  impracticable,  be- 
cause the  processes  of  shifting  render  it  impos- 
sible to  ascertain  the  final  incidence  with  suffi- 
cient accuracy  for  classification.  It  has  also  been 
suggested  that  we  might  use  the  different  specific 
means  employed  by  nations  to  measure  benefit  or 
faculty.  But  here  again  we  meet  with  difficulties 
that  are  almost  insuperable ;  for  in  that  case  the 
classification  will  depend  on  the  theory  adopted  as 
to  the  correct  measures.  If  we  adopt  the  benefit 
theory,  our  classification  will  depend  on  the  differ- 
ent indices  of  benefit  chosen.  If  we  adopt  the 
faculty  theory,  then  our  classification  will  be  accord- 
ing to  the  indices  of  faculty.  But  we  are  not  at 
liberty  to  adopt  one  or  the  other  of  these  theories 
exclusively,  because  no  nations  have  done  so  in 
practice,  and  their  taxes  are  some  of  them  based  on 
the  one  theory,  or  at  least  best  explained  thereby, 
and  some  on  the  other,  while  many  combine  both  or 
may  be  interpreted  in  either  way.  At  the  same  time 
many  taxes  that  could  not  be  justified  on  either 
basis  are  retained  by  the  nations  on  grounds  of  general 
expediency,  because  they  yield  considerable  revenue, 


86  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

or  because  they  have  been  long  in  use.  If,  there- 
fore, we  adopt  a  classification  presupposing  either 
theory,  we  shall  find  many  taxes  that  do  not  con- 
form to  it.  Inasmuch  as  no  consistent  plan  for 
the  measurement  of  taxation  has  been  adopted  by 
any  country,  no  uniform  method  of  classification 
upon  "  natural "  grounds  can  be  found. 

These  difficulties  are  inherent  in  the  matter  that 
we  are  attempting  to  classify.  The  librarian  gen- 
These  difficul-  era%  desires  to  arrange  his  books  ac- 
ties  are  insu-  cording  to  the  subjects  treated.  But 
perabie.  encyclopaedias  could  not  be  so  arranged 

without  tearing  the  books  to  pieces.  We  might 
theoretically  dissect  each  tax,  and  assign  its  parts 
to  the  different  categories  according  to  the  real 
nature  of  each  part.  But  we  gain  little  by  this 
painful  process.  In  this  case  classification  will  not 
help  us  to  ascertain  the  real  nature  of  the  things 
studied. 

These  difficulties  have  not  always  been  regarded 
as  insuperable,  and  many  brave  attempts  have  been 
Previous  made  to  overcome  them,  but  with  so 
attempts  at  little  uniformity  as  to  mark  the  failure. 
classification.  There  are  almost  ag  many  classincatioiis 

as  writers.  The  least  satisfactory  of  all  are  those 
that  attempt  to  find  some  natural  arrangement. 
Those  which  have  the  most  apparent  success  accept 
the  official  names  used  by  the  treasury  departments 
of  the  different  nations,  and  give  them  merely  such 
limitation  as  is  necessary  to  use  them  scientifically. 


CHAP.  II     CLASSIFICA  TION  OF  TAXES  AND  FEES         87 

SEC.  3.    Perhaps  the  most  common  distinction  is 
that  made  between  direct  and  indirect  taxes.     This 

distinction  first  obtained  theoretical  im- 

The  distinc- 

portance  in  the  writings  of  the  Physio-  tion  between 
crats.     By  direct  taxes  they  meant  any  frect  and  in~ 

J  J    direct  taxes  is 

of  those  taxes  which  were  levied  imme-  old,  and  im- 
diately  upon  the  "  produit  net."  There  P°rtant- 
alone,  they  argued,  could  be  the  fund  out  of  which 
taxes  could  be  paid.  To  levy  taxes  anywhere  else 
was  indirect,  because  the  burden  would  be  shifted 
from  one  to  another  until  it  rested  there.  The 
assignment  of  any  particular  tax  to  one  or  the  other 
of  these  categories  was  with  them  a  mark  of  ap- 
proval or  condemnation.  With  the  recognition  that 
other  economic  processes  besides  those  which  added 
to  the  material  property  of  the  world  created  wealth, 
this  peculiar  theory  of  taxation  drifted  into  abey- 
ance. The  same  terms,  however,  have  been  widely 
used  by  officials  and  writers  and  have  such  preva- 
lence that  a  recognition  of  them  cannot  be  avoided. 

Rau  and  Wagner  have  made  the  most  elaborate 
attempts  to  define  the  modern  usage.     In  this  they 
were  only  partly  successful,  because  of   Wagner's  deji- 
irregularities  in  official  usage.     But  de-  ^fr^and  in 
spite  these  irregularities  the  terms  are  direct  taxes. 
valuable.      Wagner's    distinction   is   practically   as 
follows.     There  are  two  ways  in  which  direct  and 
indirect  taxes   differ.      (1)    In   the   case   of   direct 
taxes,  at  least  in  the  expectation  of  the  law-giver, 
the  tax -payer  is  also  the  tax-bearer ;  any  shifting  of 


88  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

the  burden  to  another  is  not  expected,  not  desired, 
and  sometimes,  even,  forbidden,  or  subject  to  pen- 
alty. Indirect  taxes  are,  vice  versa,  those  in  which 
the  tax-payer  is  not  permanently  the  tax-bearer,  or 
is  not  intended  to  be  ;  but  a  shifting  of  the  burden 
to  another  is  expected  and  desired,  and  may  even  be 
prescribed.1 

But  this  element  of  shifting  is  not  the  only  one 
that  is  essential  to  the  idea.  The  second  character- 
Administra-  istic  is  what  may  be  called  the  techni- 
Q/eftre^ramT  ca^'  administrative  conception  of  direct 
indirect  taxes,  and  indirect  taxes.  It  is  based  on  the 
method  of  procedure.  (2)  Direct  taxes  are  such 
as  are  regularly  laid  according  to  some  fixed  fact 
(or  one  so  treated,  and  at  least  somewhat  fixed), 
something  regularly  recurrent,  and  hence  previously 
ascertainable,  —  a  fact  as  of  personality,  of  rank,  of 
property,  of  earning,  etc., —  and  are,  consequently, 
assessed  according  to  some  list  or  roll.  (Cadastre.) 
Indirect  taxes,  on  the  other  hand,  are  such  as  are 
laid  according  to  some  changing,  temporary,  more 
or  less  accidental  fact  which  is,  consequently,  not 
previously  ascertainable,  —  something  the  result  of 
processes,  events,  transactions,  —  and  are  laid  and 
collected  according  to  tariffs.2 

These  two  methods  of  distinction  follow  quite 
closely  the  usages  of  theoretical  writers  and  of  offi- 

1  Wagner,  Finanzwissenschaft,  II.,  1st  ed.,  p.  269 ;  2d  ed.,  sec. 
97-100.     Schonberg's  Handbuch,  3d  ed.,  III.,  p.  171. 

2  Wagner,  Finanzwissenschaft,  II. ,  2d  ed.,  p.  239. 


CHAP,  ii     CLASSIFICATION  OF  TAXES  AND  FEES         89 

cial  bureaux.  There  are  important  exceptions  in 
some  countries.  Thus  in  France  the  customs  duties 
are  not  officially  classed  as  indirect  Exceptions  in 
taxes,  but  form  a  class  by  themselves  official  usage. 
akin  to  direct  taxes.  In  the  United  States  at  the 
time  of  the  Civil  War  the  income  tax  was  viewed  by 
the  courts  as  an  indirect  tax,  or  at  least  not  as  a 
direct  tax  in  the  sense  of  the  Constitution.1  This 
decision,  however,  was  reversed  in  1895  by  a  bare 
majority  of  the  same  court,  which  decided  that  a 
similar  income  tax  was  a  direct  tax  in  the  meaning 
of  the  Constitution.  This  decision  is  in  accord  with 
the  distinction  made  above. 

The  principal  direct  taxes  are :  the  land  taxes, 
building  taxes,  property  taxes,  poll  taxes,  class  taxes, 
income  taxes,  industry  taxes;  the  indirect  „, 

J.  axes  belong- 

taxes  :  the  customs  duties  (with  the  ex-  ing  to  each 
ception  of  the  French),  internal  excise  kind' 
taxes,  transaction   taxes,   most    fees    and    licenses. 
The  inheritance  taxes,  or  death  duties,  as  they  are 
called  in  England,  are  not  easy  to  classify.     In  the 
first  sense  they  are  direct  taxes,  and  in  the  second 
they  are  indirect.     This  is,  perhaps,  the  only  impor- 
tant tax  that  cannot  be  easily  classified.    The  inheri 
The  inheritance  tax  wherever  it  exists  is  tance  tax  hard 
used  because  it  is  expedient   and  with-  toclassify- 
out  much  cost  yields  a  large  return.     It  is  levied 

1  Springer  v.  United  States,  102  U.  S.  508.  See  article  "The 
Direct  Tax  of  1861,"  Quarterly  Journal  of  Economics,  July,  1889  ; 
Seligman,  "The  Income  Tax,"  Forum,  1895. 


90  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

at  a  time  when  the  persons  paying  it  are  not  in 
position  to  demand  a  strong  justification.  It  is 
sometimes  justified  on  the  ground  that  it  compen- 
sates for  previously  unpaid  taxes.  If  this  justi- 
fication holds,  then  the  inheritance  tax  must  be 
classed  as  a  direct  tax. 

SEC.  4.    A  few  other  terms  which  are  often  used 
as  the  names  of  different  groups  of  taxes  and  help 
*n  a  wa    ^°  c^ass^    them  must  be  men- 


Taxes  on  er 

sons,  property,  tioned    in  this   connection.      We  some- 

times speak  of  taxes  as  being  separable 
into  (1)  those  on  persons,  (2)  those  on  property, 
(3)  those  on  income.  These  terms  do  not  indicate 
the  final  source  from  which  the  tax  is  paid,  but  the 
basis  upon  which  it  is  levied. 

1.  In  the  case  of  personal  taxes  the  different  per- 
sons who  are  to  pay  the  tax  are  listed  and  assessed, 
either  (1)  individually,  as  in  the  case  of  per  capita 
taxes,  or  (2)  as  representatives  of   a   group,  as   in 
the    family    or    hearth    taxes,  or  (3)  according   to 
Personal          some  characteristic,  as  rank  in  life,  office, 
taxes.  employment,  age,    etc.,  supposed   to   be 
indicative  of  the  benefit  they  receive  from  the  gov- 
ernment or  their  ability  to  pay.     A  complete   sys- 
tem of  such  taxes  might  be  built  up,  and  it  is  possible 
to  suppose  that  all  the  requirements  of  justice  could 
be  met  thereby. 

2.  Taxes  on  property  are  those  taxes  which  take 
the  property  owned  by  a  person  as  the  index  either 
of  the   benefit   received  or  of   the   ability  to   pay. 


CHAP.  II     CLASSIFICA  TION  OF  TAXES  AND   FEES         91 

These  taxes  may  be  considered  as  pursuing  prop- 
erty wherever  it  is  to  be  found,  with  little  or  no 
regard  for  the  personality  of  the  owner,  property 
They  are  not,  of  course,  in  any  but  the  taxes- 
most  exceptional  instances,  paid  out  of  property. 
But  no  particular  regard  is  had  to  the  real  source 
of  payment.  They  may  be  levied  upon  any  and 
every  kind  of  property.  They  are  sometimes  called 
real  taxes  from  res,  things.  But  this  usage  has  no 
established  sanction  in  English ;  in  that  language 
real  taxes  are  taxes  upon  real  estate. 

3.    Taxes  on  income  in  the  broadest  sense  are  all 
those   taxes   which  make  wealth  in  the 

Income  taxes. 

process  of  acquisition  the  basis  of  assess- 
ment. These  are  of  two  principal  kinds:  (1)  those 
which  are  levied  upon  the  annual  increment  of  wealth, 
as  such,  irrespective  of  the  person  who  is  the  recipi- 
ent thereof.  That  is,  they  treat  the  various  items 
of  wealth  increment  as  the  basis  of  taxation  without 
regard  to  the  grouping  of  these  increments  into  a 
whole  in  the  income  of  any  particular  person,  and 
consider  the  person  paying  the  tax,  only  in  so  far  as 
he  is  an  income  producer  through  his  own  activities. 
This  is  the  character  of  the  British  income  tax.  (2) 
Those  which  demand  of  each  person,  or  seek  to  ob- 
tain concerning  each  person,  a  summary  of  the  total 
income  he  receives.  This  latter  tax  is  sometimes  so 
treated  as  to  make  it  difficult  to  distinguish  it  from 
a  personal  tax,  for  the  different  persons  are  listed  and 
classed  according  to  amount  of  income  they  receive. 


92  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

By  a  peculiar  and  entirely  unwarranted  use  of  com- 
mon English  terms  in  a  strange  and  foreign  sense, 
Subjective  property,  income,  and  the  like  have  been 

and  objective  called  the  tax  objects,  and  the  COrrespond- 
taxes.  An  .  .  . 

unallowable  mg  taxes  objective  taxes,  meaning  that 
distinction.  they  are  taxes  on  things  in  distinction 
from  taxes  on  persons.  On  the  other  hand,  the  per- 
sons are  called  the  tax  subjects,  and  personal  taxes 
called  subjective.  This  usage,  although  it  has  the 
sanction  of  a  great  authority,  in  Professor  Bastable, 
has  fortunately  not  been  favourably  received.  Pro- 
fessor Seligman,  in  a  review  of  Bastable's  book, 
pointed  out  that  by  the  object  of  a  tax  we  usually 
mean  the  purpose  of  the  tax,  and  the  tax  subjects 
may  be  things  as  well  as  persons  subjected  to  the 
tax.1 

SEC.  5.    Following  the  lead  of  Adam  Smith,  various 

attempts  have  been  made  to  classify  taxes 
Classification  - 

of  taxes,  ac-     according  as  they  fall  upon  one  or  the 

cording  as        other  of  the  different  shares  in  distribu- 

ter/ fall  upon 

rent,  interest,    tion,  —  rent,  interest,  profits,  and  wages. 


profits  or          BU^  as  Bastable  has  well    shown,   the 

wages,  fails.  t-   i      ,1        j-«; 

sources  from  which  the  different  taxes 
are  paid  are  generally  a  combination  of  several  of 
these.  The  wealth  or  income  of  very  few  persons 
consists  of  simply  one  of  these  shares.  The  attempts 
to  carry  out  such  classifications  consistently  have 
failed.  Bastable's  attempted  compromise  by  calling 
such  taxes  as  can  be  traced  directly  to  one  or  the 
1  Political  Science  Quarterly,  VII.,  p.  717. 


CHAP,  ii     CLASSIFICATION  OF  TAXES  AND  FEES         93 

other  shares  in  distribution  primary,  and  all  others 
secondary,  brings  us  to  practically  the  same  results 
that  were  gained  by  Wagner  in  the  discussion  of 
direct  and  indirect  taxes.  His  primary  taxes  are 
those  called  direct  taxes  above,  his  secondary  are  the 
indirect. 

One  other  important  set  of  distinctions  must  re- 
ceive our  attention,  because  it  has  the  sanction  of  two 
prominent  authorities.  Wagner  suggested  and  Cohn 

accepted  the  classification  into,  taxes  paid   , 

Taxes  on  ac- 

out  of  wealth  at  the  time  of  its  acquisi-  quisition, 
tion    (ErwerV),   or   while   in    possession  ta™s°nP°*- 

session,  and 

(Besitz),  or  upon  its  consumption  (Ver-  onconsump- 
brauch).     This  distinction,  according  to  tlon' 
the  stage  in  which  the  tax   finds  the  wealth  from 
which  it  is  paid,  is  often  useful  in  showing  the  ef- 
fects of  certain  taxes. 

Another  very  valuable  distinction  is  that  made 
by  the  term  "taxes  on  revenue."  Taxes  faxes  on  reve- 
on  revenue  are  those  that  fall  or  are  as-  n<ue- 
sessed  on  the  revenue,  or  income  yielded  by  different 
kinds  of  property.  These  are  a  species  of  taxes  on 
acquisition. 

The  three  sets  of  terms  which  we  have  used  in 
this  work  are  :  (1)  direct  and  indirect  taxes,  (2) 
personal,  property,  and  income  taxes,  (3)  taxes  paid 
on  wealth  at  acquisition,  in  possession,  and  at  the  time 
of  consumption. 

Another  distinction  based  upon  the  method  of  fix- 
ing the  rate  is  important  because  of  the  use  made  of  it 


94  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

in  the  American  Constitution.     That  is  the  distinc- 
tion between  apportioned  and  proportioned   taxes. 
Taxes  are  apportioned  when  the  whole 

Proportioned 

andappor-  amount  to  be  raised  is  fixed  and  then 
taxes,  diyided  among  the  different  tax-payers. 
They  are  proportioned  when  the  rate  is  fixed  and 
then  assessed  on  the  base,  which  may  be  either  the 
property  or  the  income  of  the  tax-payers.1 

SEC.  6.  We  now  come  to  the  important  task  of 
classifying  fees.  The  essential  consideration  to  be 
Classification  neld.  in  mind  about  these  payments  is 
of  fees  follows  that  they  cover  a  part  of  the  total  cost 

that  of  govern-      ........  ,    ,        , .    ., .  t  .   , 

ment  activi-  of  certain  governmental  activities,  which 
ties-  are  performed  for  the  benefit  of  all,  but 

yet  confer  a  real  or  assumed  special  benefit  on  the 
individual.  When  the  payment  covers  the  whole  or 
a  little  more  than  the  whole  cost,  it  is  a  price.  Since 
fees  are  levied  upon  the  receivers  of  certain  benefits 
from  the  government,  it  follows  that  the  only  classi- 
fication for  fees  is  that  which  shows  what  activities 
of  the  government  convey  the  benefit.  We  can  thus 
classify  according  to  the  different  departments  of 
the  government,  for  the  services  of  which  fees  are 
collected. 

1.  The  most  numerous  are  the  judicial  and  legal 
Judicial  and  f  ees»  the  character  of  which  has  already 
legaifees.  been  made  clear  from  the  discussion  of 
the  nature  of  these  expenditures.2  Examples  of 

1  See  further  definitions  in  sec.  8. 

2  See  Part  I.,  Chap.  III.,  sec.  4. 


CHAP,  ii     CL  A  SSI  PICA  TION  OF  TAXES  AND  FEES         95 

these  are  the  regular  court  costs  and  fees,  probate 
fees,  the  charges  for  recording  deeds,  mortgages, 
contracts,  marriages,  etc. 

2.  Next  come  the  administrative  fees  for  the  spe- 
cial services  of  that  department.  They  are  :  police 
fees,  charged  for  the  special  benefits  ac-  Administra- 
cruing  or  supposed  to  accrue  to  the  indi-  tive  fees- 
viduals  from  the  exercise  of  the  police  power  of  the 
State ;  the  fees  for  education,  when  charged ;  a 
large  number  of  industrial  and  commercial  fees  for 
services  rendered  individuals  in  their  industrial  and 
commercial  undertakings.  The  industrial  fees  in- 
clude license  charges  for  permission  to  carry  on  cer- 
tain businesses  (care  must  be  taken  not  to  confuse 
these  with  police  fees,  nor  with  business  taxes  as- 
sessed on  the  same  plan).  Commercial  fees  include 
road  and  canal  tolls,  harbour  dues,  and  a  number  of 
similar  charges. 

A  very  important  class  of  administrative  fees  are 
those  known  as  special  assessments  or  in  England  as 
"betterment"  taxes,  levied  for  local  improvements 
affecting  property,  as  streets,  sewers,  etc.  special  assess- 
Professor  Seligman  has  defined  these  as  ments- 
follows:  "A  Special  Assessment  is  a  compulsory 
contribution  paid  once  and  for  all  to  defray  the  cost 
of  a  specific  improvement  to  property  undertaken  in 
the  public  interest,  and  levied  by  the  government  in 
proportion  to  the  special  benefits  accruing  to  the 
property  owner."  He  regards  them  as  of  so  much 
importance  as  to  make  them  a  class  of  revenues 


96  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

co-ordinate  with  taxes  and  fees.  Strictly  speaking, 
they  are  fees. 

SEC.  7.  The  revenues  derived  from  prices  or  from 
the  production  and  sale  of  commodities  or  services 
The  analysis  are  of  exactly  .the  same  character  as  the 
l^tpowi-  earnings  of  the  people.  This  is  true 
cai  Economy,  whether  the  products  sold  are  derived 
from  the  public  domain  or  from  public  industry. 
The  principle  underlying  this  kind  of  revenue,  the 
analysis  thereof,  and  to  a  certain  extent  the  disposi- 
tion thereof,  are  the  general  subjects  of  Political 
Economy.  To  introduce  a  discussion  of  it  here 
would  be  to  invade  the  main  fields  of  economic  sci- 
ence. Surely,  unless  we  commit  the  fallacy  commonly 
attributed  to  the  mercantilists  of  regarding  money 
alone  as  wealth,  and  treat  all  the  money  flowing  into 
the  treasury  as  revenue,  no  matter  whether  it  merely 
takes  the  place  of  other  kinds  of  wealth  or  not,  we 
must  exclude  a  full  discussion  of  prices  from  the 
subject  of  public  revenues. 

But  since  a  great  deal  has  been  made  by  writers  of 
note,  of  the  money  prices  received  in  this  way  as  a 
part  of  public  revenues,  a  few  words  in  defence 
of  this  position  are  necessary.1  Let  us  take  the 
common  example  of  the  water  supply.  We  may 
suppose  that  a  certain  city  is  supplied  with  water 
by  two  private  companies,  both  of  which  have  the 

1  Most  German  authorities  discuss  either  the  net  or  the  gross 
income  from  domains.  Cf.  Bastable  and  Seligman  on  "Classifi- 
cation." 


CHAP,  ii     CLASSIFICATION  OF  TAXES  AND  FEES         97 

right  to  lay  pipes  wherever  they  wish.  They  will  then 
supply  water,  supposing  that  they  actually  compete, 
at  prices  determined  mainly  by  the  costs,  Example 
which  are  those  of  management,  interest  the  water  sup- 
on  the  "  plant,"  the  supplies  and  running  p  y' 
expenses.  The  average  prices  will  be  considerably 
higher  than  need  be  by  virtue  of  the  duplication  of 
the  plant,  etc.  Suppose,  however,  before  any  ma- 
terial duplication  is  reached  they  unite,  forming  one 
company  which  has  the  monopoly.  The  charges 
will  now  be  regulated  by  "what  the  traffic  will 
bear,"  and  provided  the  supply  is  ample  will  tend 
to  conform  to  those  rates  which  will  yield  the  largest 
net  returns.  The  principles  by  which  monopoly 
prices  are  regulated  are  well  known  to  students  of 
economics.  The  charges  in  this  case  cannot  be 
greater  than  the  cost  to  the  citizens  of  operating 
their  own  wells,  nor  even  so  high  as  to  induce  the 
citizens  to  economise  materially  in  their  use  of 
water.  But  suppose  that  the  townspeople  are  not 
content  with  the  rates,  or  with  the  service.  They 
attempt  regulation  and  fail.  They  may  determine 
to  buy  out  the  plant.  Once  the  city  owns  the  plant 
it  may  run  it  in  one  of  four  ways.  (1)  The  four 
It  may  run  it  as  the  company  did,  to  m*^°/^_ 
make  the  highest  possible  profits,  charg-  agement. 
ing  all  or  nearly  all  the  traffic  will  bear.  The  surplus 
over  costs  goes  into  the  treasury  and  helps  to  defray 
the  other  expenditures.  But  the  rules  determining 
what  the  traffic  will  bear  are  rules  of  pure  econom- 


98  INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

ics.  There  is  absolutely  no  difference  between  this 
public  business  and  a  private  business.  The  method 
of  "  charging  what  the  traffic  will  bear "  is  the 
method  in  economic  life  of  determining  the  value 
of  commodities  so  sold.  It  takes  the  place  in  the 
sale  of  monopoly  goods  of  the  "  free  dickerings  of 
the  market"  by  which  the  price  of  other  goods  is 
determined.1  The  private  company  had  to  pay  ex- 
penses, so  does  the  city  ;  the  private  company  en- 
joyed a  surplus  or  made  an  "  unearned  increment," 
so  does  the  city  ;  the  private  company  spent  this 
surplus  to  the  satisfaction  of  the  wants  of  its  stock- 
holders; the  city  spends  the  surplus  to  the  benefit  or 
satisfaction  of  the  general  wants  of  the  citizens,  who 
may  be  regarded  as  its  stockholders.  Even  if  it  fore- 
goes taking  quite  all  the  surplus,  the  principle  is  the 
same.  A  private  company  often  does  that  in  defer- 
ence to  public  opinion.  (2)  The  city  may  decide 
not  to  make  money,  but  to  charge  only  what  the 
service  costs  and  make  the  service  as  good  as  possi- 
ble. It  then  foregoes  taking  the  full  price  of  the 
wealth  that  it  has  produced  and  allows  each  con- 
sumer to  enjoy  the  surplus.  Then  the  payment  by 
the  citizen  is  a  fee.  (3)  It  may  charge  a  fee  much 
smaller  than  the  cost,  or  a  fee  for  all  water  con- 
sumed over  a  certain  amount,  but  provide  a  certain 

1  See  Sidgwick,  Bk.  II.,  Ch.  X.;  Andrews,  Institutes  of  Eco- 
nomics, p.  112;  Marshall,  EC.  of  Ind.,  pp.  180  ff.;  Senior, 
pp.  103-114;  Sumner,  Essays,  p.  46;  Hadley,  It.  R.  Trans., 
p.  100;  Seligman,  Bailway  Tariffs,  etc.,  pp.  8ff. 


CHAP,  ii     CLASSIFICA  TION  OF  TAXES  AND  FEES         99 

amount  of  water  for  each  citizen  at  the  common  cost. 
(4)  It  may  distribute  the  water  freely  and  pay  for 
it  out  of  the  common  fund  derived  from  taxation. 
Now  the  sums  received  in  the  last  three  cases  are 
all  regarded  as  payments  for  the  public  gniy  three  Of 
service.  They  are  an  essential  part  of  these  methods 

governed  by 

the    public    revenues,   taxes,   and   fees, 


Their  amount  is  not  determined  by  Ples- 
any  process  known  to  political  economy  for  de- 
termining prices.  But  so  long  as  the  principles 
determining  the  amount  of  the  money  taken  and  the 
management  of  the  business  are,  as  in  the  first  case, 
purely  economic,  there  is  no  need  of  including  this 
money,  as  distinct  from  the  wealth  produced  in 
the  revenues  of  the  public  treasury,  and  burdening 
financial  science  with  a  discussion  of  matters  fully 
within  the  scope  of  the  larger  science.  All  that  we 
need  to  say  is  that  the  State  produced  so  and  so 
much  wealth  in  the  form  of  such  and  such  com- 
modities which  it  sold  for  so  and  so  much  money. 
These  economic  industrial  or  commercial  revenues 
are  supplemented  by  others  which  are  of  a  fiscal 
character.1 

As  Professor  Cohn  has  so  well  pointed  out,  it  is 
a  very  different  problem  that  we  have  to  deal  with 
when  the  management  of  some  industry   Taxation  by 
is  made  merely  the  form  or  means  for  ™-eans°fm~ 

J  dustnal  mo- 

collecting  a  tax  from  certain  classes  of  nopoiy. 
persons.     The  French  tobacco  monopoly,  for  exam- 
i  Cf.  Cohn,  sec.  98. 


100         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

pie,  is  not  in  any  sense  to  be  looked  upon  as  an  in- 
dustry undertaken  in  the  common  interest,  or  even 
in  the  interest  of  a  particular  class.  It  is  the  aim 
of  the  French  government  to  tax  the  users  of  to- 
bacco. This  aim  is  attained  by  other  governments 
through  different  processes.  The  form  of  a  monop- 
oly has  been  found  to  be  remarkably  easy,  expedient, 
and  successful  as  a  method  of  indirect  taxation. 

SEC.  8.    The  base  of  a  tax  is  the  thing  or  phenom- 
enon upon  which  the  tax  is  assessed.     The  base  is 

not    always    the    source.      Thus   a   tax 
The  "  base."    •  ,  J 

based  on  property  is  generally  paid  out 

of  income  or  revenue,  which  comes  sometimes  from 
the  property,  sometimes  from  some  other  source. 
The  direct  taxes  are  almost  always  called  by  the 
name  of  the  "base." 

The  tax-rate  is  the  amount  of  the  tax  falling  on 
each  unit  of  the  base.  The  base  is  generally  ex- 
The"rate"  Presse(l  in  units  of  values  ;  as  for  ex- 
and  the  "unit  ample  $100  worth  of  property.  It  may, 
lse'  however,  be  some  other  unit,  as  one  per- 
son, one  ox,  one  acre,  one  yard,  one  ton,  etc.  Some- 
times the  unit  of  the  base  is  very  complex.  For 
example,  in  Vermont  the  rate  is  so  much,  say  $1.50 
on  each  $1.00  in  the  "  Grand  List."  But  only  1  per 
cent  of  certain  kinds  of  property  is  entered  in  the 
grand  list.  This  arose,  originally,  from  the  custom 
of  fixing  a  definite  uniform  value  for  each  piece  of 
property,  as  so  much  per  acre  of  land,  so  much  per 
head  of  cattle,  so  much  per  horse,  irrespective  of 


CHAP,  ii      CLASSIFICATION  OF  TAXES  AND  FEES      101 

the  actual  value,  and  then  fixing  the  rate  upon  this 
artificially  constructed  base. 

The  rate  may  be  proportioned,  apportioned,  pro- 
gressive, degressive,  or  regressive. 

When  the  rate  is  proportioned,  it  is  the  same  per 
cent  of  all  property.     When  it  is  appor-  "Propor- 
tioned, the  total  amount  to  be  raised  is  ;joned "  m'e  >' 

appor- 

ascertained  and  then  distributed,  share  tioned"  rate. 
for  share,  on  each  unit  of   the  base. 

A  tax  is  progressive  when  the  rate  increases  more 
rapidly  than  the  base  ;  that  is,  when  a  higher  per 
cent  is  assessed  upon  the  higher  values  "progres- 
than  upon  the  lower.  This  progression  sive "  rate- 
may  be  regular  and  start  from  the  very  smallest  base, 
or  one  unit.  For  example,  the  rate  may  increase 
in  some  geometrical  ratio,  while  the  base  increases 
in  an  arithmetical  ratio.  Of  course  any  set  of  ratios 
may  be  chosen.  The  progression  may  be  irregular 
in  several  different  ways.  Thus  the  progression 
may  go  by  stages  ;  i.e.  between  certain  limits,  in 
arbitrarily  fixed  groups,  the  rate  may  be  proportional, 
but  increase  gradually  with  each  higher  group.  Or 
the  progression  may  affect  only  certain  parts  of  the 
base.  That  is,  a  certain  minimum  may  be  taxed  pro- 
portionally, then  a  certain  part  taxed  progressively, 
and  the  proportional  rate  may  set  in  again  after  a 
certain  high  point  has  been  reached.  Again,  a  cer- 
tain minimum  may  be  altogether  exempt,  and  the 
rate  after  that  progressive. 

The  rate  is  degressive  when  the  progression  grows 


102         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

smaller  as  the  base  increases.  There  are  various 
ways  of  accomplishing  this.  The  most  common  is  to 
"Degressive"  exempt  a  certain  moderate  amount  of  the 
rate.  IQ&SQ  and  deduct  that  amount  from  all 

larger  sums,  while  a  nominally  proportional  rate  is 
levied  on  the  remainder.  In  this  way  a  proportion- 
ally increasing  burden  is  laid  on  the  larger  amounts 
of  the  base  ;  but  the  ratio  of  increase"  grows  grad- 
ually less,  until,  when  the  base  reaches  a  very  large 
amount,  the  increase  in  rate  is  practically  nil,  and 
the  rate  becomes  practically  proportional.  For  ex- 
ample, we  may  have  an  income  tax  in  which  the  rate 
is  3  per  cent  on  all  income  in  excess  of  $500.  The 
man  who  has  $1000  pays  1.5  per  cent  on  his  whole 
income,  while  the  man  who  has  $10,000  pays  2.85  per 
cent,  and  the  rate  approaches  but  never  reaches  3  per 
cent  by  ever  decreasing  amounts.  So  that  the  man 
with  an  income  of  $100,000  pays  only  0.0015  less 
than  three  per  cent.  Another  method  is  to  make  a 
deduction  for  the  incomes  below  a  certain  amount 
only,  the  rate  above  that  being  proportional.  A  de- 
gressive rate  is  properly  an  irregular  form  of  pro- 
gression. Both  progressive  and  degressive  taxes  are 
sometimes  called  graduated. 

A  regressive  rate  is  just  the  reverse  of  a  progres- 
sive or  of  a  degressive  rate.  In  this  case  the  rate 
" Regressive"  decreases  as  the  property  increases,  and 
rate.  a  neavier  burden  is  laid  on  the  smaller 

amounts.  The  regressive  rate  may  be  irregular  in 
as  many  ways  as  the  progressive.  That  is,  it  may 


CHAP,  ii     CLASSIFICATION  OF  TAXES  AND  FEES       103 

vary  in  the  reverse  of  any  of  the  ways  in  which  the 
progressive  rate  may  vary. 

Assessment  is  the  name  applied  to  the  whole  proc- 
ess of  ascertaining  the  amount  of  tax  due  from  each 
person  or  property.  It  consists  of  two 
steps,  (1)  the  valuation  of  the  property 
or  income,  or  the  listing  of  the  things  taxed  ;  (2) 
the  levying  of  the  rate  or  tax,  that  is  fixing  the 
amount  each  unit  is  to  pay. 

The  tax  list  or  roll  contains  the  record  of  the 
amounts  assessed  and  levied.  In  some  European 
countries  these  lists  are,  for  certain 

"Tax  list." 

taxes,   elaborate,   permanent,    or   partly 
permanent  records  which  serve  various  legal  pur- 
poses as  well   as   the   fiscal,   as    for    example    the 
record  of  titles,  and  are  called  cadastres. 

Impost  is  a  general  term  for  any  tax,  but  there 
is  a  tendency  to  make  it  synonymous 

J  J         J  "Impost." 

with  indirect  taxes. 

Customs  duties  are  indirect  taxes  levied  on  the 
goods   imported  into  or  exported  from  "Customs 
certain  territories.  duties." 

Excises  (English)  or  internal  revenue  taxes 
(American)  are  indirect  taxes  levied  on  „„  . 

'  Excises     or 

goods    produced    or    consumed    within  "internal  rev- 
certain  territorial  limits.  enue taxe°" 

Toll   was    originally   a   general    term    for    many 
taxes,  but  it  has  come  to  have  a  special 
meaning,  and  applies  only  to  the  charges 
for  passage  over  roads,  bridges,  canals,  etc. 


104         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

A  tax  is  said  to  be  shifted  when  the  tax-payer 
"Shiftin  "       reimburses  himself  from  some  one  else. 
and"inci-       The   final   incidence   of  the   tax   is  the 
falling  of  the  burden   upon   some   per- 
son who  does  not  shift  it. 


CHAP,  in  THE   TAX  SYSTEM  105 


CHAPTER  III 

THE  TAX   SYSTEM 

SECTION  1.  No  nation  has  ever  found  it  feasible 
to  adopt  any  single  tax  as  the  sole  source  of  its 
income.  No  nation  at  all  advanced  in  civilisation 
has  attempted  to  conduct  its  government  entirely 
from  the  earnings  of  its  domains  or  industries. 
Every  civilised  nation  of  to-day  combines  the  three 
sorts  of  revenues,  those  produced  by  its  own  activi- 
ties and  those  obtained  from  taxation  and  from  fees. 
And  furthermore,  no  nation  attempts  to  exist  with 
only  one  of  each  of  these  kinds  of  revenues.  These 

different    forms    are    combined    into    a   „, 

laxes 

"system"  or  general  scheme,  which  con-  of  various 
forms  more  or  less  closely  to  the  general  ^/^°^e 
ideal   of  justice  which  may  have   been  national  sys- 
adopted  by  the  nation.     To  judge  of  the  tem' 
justice  or  expediency  of  any  tax  it  should  be  studied 
in  its  place  in  the  "system."     We  have  already  seen 
the  two  main  theories  as  to  the  proper  measure  of 
taxation,  the  one,  that  taxation  should  be  measured 
by  benefit,  the  other,  that  it  should  be  measured  by 
faculty.     A  perfect  system  would  so  combine  the 
different  forms  that  the  total  burden  imposed  would 
be  in  accord  with  the  ideal  adopted. 


106         INTRODUCTION  TO  PUBLIC  FINANCE      PAKTH 

There  is  a  constant  tendency  toward  the  simplifi- 
cation of  tax  systems,  although  most  modern  systems 
The  dream  of  are  ^ill  extremely  complicated.  It  is 
a  single  tax.  ^he  dream  of  financial  theorists,  and  has 
been  ever  since  the  science  began,  and  it  is  the  aim 
of  many  would-be  reformers,  to  find  a  single  tax  that 
will  furnish  all  the  necessary  funds  for  the  support 
of  the  government.  The  Physiocrat  ic  impdt  unique 
on  the  produit  net  is  well  known,  as  is  also  the  jus- 
tification therefor.  It  is  also  well  known  wherein 
this  fails.  Modern  proposals  generally  involve  some- 
thing more  than  mere  tax  reform.  The  socialistic 
single  pro-  demand  for  a  single,  exclusive  income 
tax  with  a  progressive  rate,  is  advanced 


come  tax,  and 

the  Georgian  with  a  hope  of  effecting  a  redistribution 
land  tax.  of  the  wealth  of  the  world.  Henry 
George's  well-known  scheme  for  a  single  tax  on 
land  has  a  similar  ulterior  purpose.  His  object  is 
to  free  industry  from  trammels  which  he  supposes 
are  due  to  the  existence  of  private  property  in  land. 
In  form  his  proposition  is  not  unlike  that  of  the 
Physiocrats.  He  is  an  extreme  individualist,  but 
he  aims,  like  the  socialists,  at  a  new  distribution 
of  property.  Of  these  two  modern  schemes  for  a 
single  tax  the  first  is  perfectly  feasible  from  the 
fiscal  point  of  view.  Such  a  tax  could  probably 
be  administered  and  could  be  made  to  yield  ample 
revenue.  It  fails,  however,  to  answer  the  sim- 
plest requirements  of  justice.  For  example,  it 
would  not,  unless  our  whole  scheme  of  economic  life 


CHAP,  in  THE   TAX  SYSTEM  107 

were  first  altered,  seem  just  that  the  man  whose 
property  was  benefited  by  the  grading  and  metalling 
of  a  street  should  be  entirely  free  from  The  socialistic 
a  special  charge  for  the  special  benefit.  %°^^ 
The  scheme  is  inexpedient  for  three  rea-  unjust. 
sons :  (1)  it  presupposes  for  its  successful  adminis- 
tration a  method  of  distribution  of  wealth  very 
different  from  that  which  the  world  now  has  ;  (2)  it 
demands  a  perfection  in  the  technique  of  adminis- 
tration as  yet  absolutely  unattainable  ;  (3)  it  would 
need,  in  order  to  be  fairly  administered,  more  hon- 
esty than  men  have  yet  shown  in  their  dealings 
with  the  government.  None  of  these  reasons  mili- 
tate in  the  least  against  the  incorporation  of  an 
income  tax  in  the  tax  system,  beside  other  taxes. 
They  apply  only  to  its  use  as  the  sole  source  of 
income. 

But  the  second  scheme,  that  of  Henry  George,  is 
not  only  unjust  and  inexpedient,  it  is  also  not  feasible, 
since  it  would  not  yield  the  necessary  revenues.1 
It  is  unjust  because  its  fundamental  concept,  that 
land  values  are  solely  due  to  the  presence  The  Georgian 
of  a  large  number  of  inhabitants,  is  «nflffc  tax 

— "7 —        t  j  -i         would  not 

untrue.     The   value   of  land,  like   that  yield  sufficient 
of    other   wealth,   depends    on   the   use  ™*™*> 
to  which  it  may  be   put.     Moreover,  as   improve- 
ments   are    not    to    be    taxed,   it    would    mean    a 
heavier    burden    on    farming    lands    than    on    city 

1  See  Spahr,  "  The  Single  Tax,"  Political  Science  Quarterly, 
1891 ;  Seligman,  Essays,  pp.  64-94. 


108         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

property.  But  in  no  case  would  the  scheme  yield 
sufficient  revenue.  It  has  been  estimated  that  if 
the  entire  annual  rental  of  the  land  of  England 
were  appropriated  by  the  government,  it  would  fall 
$200,000,000,  or  £40,000,000,  short  of  what  is  now 
needed  to  support  the  government.  In  the  United 
States  the  matter  is  a  little  more  difficult  to  esti- 
mate because  it  is  not  feasible  to  get  a  statement 
of  the  value  of  the  land  apart  from  the  improve- 
ments thereon.  Taxable  real  estate  including  im- 
provements is  estimated  by  the  Eleventh  Census 
at  $35,711,209,108.  This  was  assessed  at  $18,956,- 
556,675.  The  value  of  the  improvements  is  hard 
to  estimate.  Probably  it  is  on  the  average  at  least 
two-thirds  of  the  total  value.  But  in  order  not  to 
err  on  the  side  which  favours  our  argument  we 
will  estimate  the  improvements  at  merely  one-third 
of  the  total,  which  is  certainly  a  moderate  estimate. 
That  would  leave  $23,807,472,739  as  the  highest 
value  of  the  land.  Suppose  we  take  3  per  cent 
as  the  annual  rental ;  we  have  $714,224,182  as  the 
sum  available  for  the  single  tax.  Now  the  national 
government,  the  commonwealth  governments,  and 
the  municipalities  spend  together  over  $915,954,055 
annually.  That  is,  at  the  most  favourable  estimate 
the  single  tax  would  fall  $200,000,000  short  of  what 
is  necessary  to  maintain  the  governments.  Mr.  Spahr 
estimates  that  in  Connecticut  the  assessed  value  of 
land  increased  $36,000,000  during  a  period  in  which 
$70,000,000  were  paid  in  commonwealth  and  local 


CHAP,  in  THE   TAX  SYSTEM  109 

taxes.  All  of  these  figures,  which  err  on  the  side 
of  moderation,  show  conclusively  that  even  in  the 
United  States  no  tax  on  land,  alone,  sufficiently 
large  to  pay  the  entire  expenses  of  the  government 
could  be  laid  without  appropriating  enough  to  ruin 
the  user  of  the  land,  and  practically  prohibit  its 
cultivation. 

It  may  be  urged  that  as  the  existing  land  taxes  are 
regular  charges,  their  capitalised  value  has  already 
been  deducted  from  the  value  of  the  land.     But  this 
would  only  be  true  if  all  the  taxes  now  ^u  taxes  not 
fell  upon  the  land.     Most  of  the  exist-  capitalised 

and  deducted 

mg  taxes,  however,  fall  upon  other  in  the  present 
sources  of  revenue  and  improvements.  value  °f land' 
The  abolition  of  all  other  taxes  on  different  forms 
of  property  would  also  be  unjust.  This  can  be 
shown  without  abandoning  the  ground  of  the 
Georgian  doctrine.  Every  kind  of  economic  wealth 
may,  under  certain,  circumstances,  and  frequently 
does  increase  in  value  in  such  a  way  as  to  yield  its 
owner  an  "  unearned  "  increment.  Why  should  that 
escape,  and  the  "  unearned  "  increment  of  land  values 
alone  be  taxed  ? 

Every  tax  tends  to  repress  the  development  of  the 
particular  phenomenon  on  which  it  rests. 

A  single  tax 

A  single  tax  of  any  kind  will  tend  to  would  defeat 
defeat  its  own  ends  by  repressing  the  JjJJJ^JjJj 
existence    of    the    phenomenon    which  the  thing  upon 
forms  the  signal  for  its  assessment.     For  which  based' 
example,  in  Mexico  land  is  not  taxed,  but  if  the 


110         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

farmer  kills  a  cow,  or  sells  a  crop,  he  is  taxed. 
Naturally  this  discourages  any  extension  of  the  uses 
of  land  that  involve  this  disagreeable  consequence. 
The  experience  of  nations  which  has  led  them  to 
diversify  the  forms  of  their  taxation  is,  therefore, 
supported  by  theoretical  considerations.  The  tax 
system  of  the  United  States  is  still,  and  the  tax 
systems  of  all  European  nations  have  been,  until 
Tax  system  of  recently,  and  are  yet  in  great  measure, 
modem  no-  mere  accidental  jumbles  of  different  his- 

tions  not  logi- 
cal, torical  taxes,  which  are  retained  simply 

for  the  revenue  that  they  yield  and  not  because  of 
any  belief  in  their  justice.  It  is  not  often  that 
nations  are  rich  enough  to  enjoy  what  Professor 
Cohn  has  well  called  the  "luxury  of  reform  for  re- 
form's sake."  Their  reforms  have  been  most  often 
undertaken  for  the  sake  of  increased  revenues. 

To  be  sure,  the  rough  edges  have  been  some- 
what worn  away  by  the  friction  of  economic  forces, 
and  the  process  of  tax  shifting  has  in  some  in- 
stances removed  some  of  the  worst  injustices.  But 
examined  from  the  standpoint  of  some  ideal  sys- 
tem, the  tax  systems  of  many  modern  nations  fail 
woefully.  It  matters  little  which  ideal  be  the  one 
held  up  by  which  to  test  them;  whether  it  be  that  of 
the  benefit  theory,  or  that  of  the  faculty  theory,  the 
failure  is  the  same. 

SEC.  2.  What  in  the  opinion  of  nations  consti- 
tutes the  ideal  of  correct  or  just  taxation?  The 
answer  to  this  question  is  to  be  sought  in  the 


CHAP,  in  THE   TAX  SYSTEM  111 

theories  of  taxation  that  have  found  favour,  and 
are  generally  contained  in  the  writings  of  econ- 
omists and  financiers.  The  Physiocratic  answer 
was,  we  have  seen,  inadequate.  The  benefit  theory 
would  say  that  each  citizen  should  pay  according  to 
the  benefit  he  receives,.  What  is  the  benefit  and 
how  is  it  measured  ?  The  common  benefits  are, 
clearly,  the  peaceful  enjoyment  of  life,  The  benefit 
liberty,  and  property.  The  protection  theory  cannot 
the.  State  affords  to  life  and  liberty  is  existing  ex- 


theoretically  equal  for  all,  that  to  prop- 
erties  varies  directly  as  the  property  varies.1  A  uni- 
form tax  on  each  poll  for  the  first  two  benefits,  and  a 
proportional  tax  on  property,  would  seem  to  answer 
the  requirements  of  this  theory  with  sufficient  accu- 
racy. But  the  relatively  small  returns  from  the  poll 
taxes  and  the  great  expense  and  friction  of  collecting 
them  soon  led  to  their  partial  abandonment.  Prop- 
erty then  remained  the  basis.  The  value  of  property 
seemed  clearly  to  depend  on  its  revenue-yielding 
power.  It  is  a  matter  of  comparative  indifference 
which  is  taken.  Hence  the  idea  embodied  in  the 
famous  dictum  of  Adam  Smith:  "The  subjects  of 
every  State  ought  to  contribute  toward  the  support 
of  the  government,  as  nearly  as  possible,  ...  in 
proportion  to  the  revenues  which  they  respectively 

1  The  benefit  theory  has  been  illogically  developed  into  a  de- 
fence of  progressive  taxation.  See  Seligman,  Prog.  Tax.,  pp. 
110  ff.  I  have  not  included  this  illogical  side  in  the  discus- 
sion. 


112         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

enjoy  under  the  protection  of  the  State." 1  But  here 
again  as  the  industrial  population  separated  from  the 
soil  and  a  large  body  of  citizens  arose,  who  had  no 
land  and  little  personal  property,  and  who  could  ill 
afford  to  part  with  any  of  their  earnings,  humanity 
and  expediency  urged  the  exemption  of  the  mini- 
The exemption  mum  of  subsistence.  It  cost  too  much 
mumoFsub-  an(^  cause(^  too  much  bitterness  to  collect 
sistence.  taxes  upon  those  having  only  the  bare 

necessities.  Then  came  Jlicardo's  suggestion,  ".the 
power  of  paying  taxes  is  in  proportion  to  the  net, 
and  not  in  proportion  to  the  gross  revenue."  The 
items  that  were  to  be  deducted  were  the  costs  of 
production,  among  which  were  then  counted  the 
bread  and  meat  for  the  labourers,  which  were  re- 
garded very  much  as  so  much  fuel  shovelled  into  the 
furnace  of  a  human  machine.  Hence  it  was  argued 
that  it  would  be  too  burdensome  to  production  to 
tax  what  was  necessary  to  maintain  the  productive 
power  of  the  workers.  A  certain  amount  of  income, 
therefore,  should  be  exempt ;  for  if  taxed,  the  tax 
would  certainly  be  shifted.  Fortunately,  according 
to  the  prevalent  theory  of  wages,  the  amount  to  be 
exempted  would  remain  fixed,  or  nearly  so,  advanc- 
ing, if  at  all,  very  slowly.  So  that  all  incomes  over  a 
fixed  amount  were  to  be  taxed  proportionally;  since 
the  benefit  to  such  individuals  as  possessed  incomes 
above  the  chosen  minimum  was  supposed  to  be  in 

1  Bk.  V.,  Chap.  II.,  Part  II.     On  the  various  interpretations  of 
this  passage  see  Seligman,  Prog.  Tax.,  p.  94. 


THE   TAX  SYSTEM  113 

exact  proportion  to  the  amount  in  excess  of  the 
minimum.  Stated  broadly,  this  theory  was  as  fol- 
lows. All  taxes  must  be  proportioned  to  benefit. 
Certain  classes  only  are  benefited,  namely,  those 
having  income  over  a  certain  amount;  that  is,  over 
the  minimum  of  subsistence.  They  should  be  taxed 
on  the  amount  above  that  minimum  of  subsistence. 
It  would  seem,  then,  that  the  money  spent  in  pro- 
tection of  the  workers  who  lived  on  the  minimum  of 
subsistence  was  to  be  treated  as  if  of  benefit  to  the 
other  classes.  This  puts  the  worker  in  the  same 
category  with  the  pauper  for  whom  the  State,  from 
reasons  of  humanity,  decides  that  it  is  worth  while 
to  care.  With  a  clearer  perception  of  the  character 
of  production  and  a  realisation  of  the  fact  that  the 
worker  was  a  man  the  satisfaction  of  whose  wants, 
even  if  they  did  not  exceed  the  minimum  of  sub- 
sistence, was  yet  as  important  as  the  satisfaction  of 
the  higher  wants  of  other  classes,  came  a  realisation 
of  the  inadequacy  of  this  theory.  It  is  now  quite 
generally  abandoned,  except  as  the  legal  theory  in 
America. 

Perhaps  the  best  statement  of  the  United  States 
legal  theory  of   what  constitutes  the   just  measure 
of  taxation  is  given  by  Judge  Cooley.1   Thelegalthe_ 
"If   it   were   practicable   to   do  so,  the  oryinthe 
taxes  levied  by  the  government  ought 
to  be  apportioned  among   the   people   according  to 
the  benefit  which  each  receives  from  the  protection 

1  Taxation,  p.  24. 

i 


114         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

the  government  affords  him ;  but  this  is  manifestly 
impossible.  The  value  of  life,  liberty,  and  of  the 
social  and  family  rights  and  privileges,  cannot  be 
measured  by  any  pecuniary  standard;  and  by  the 
general  consent  of  civilised  nations,  income  or  the 
sources  of  income  are  almost  universally  made 
the  basis  upon  which  the  ordinary  taxes  are  esti- 
mated. This  is  upon  the  assumption,  never  wholly 
true  in  point  of  fact,  but  sufficiently  near  the  truth 
for  the  practical  operations  of  government,  that 
the  benefit  received  from  the  government  bears 
some  proportion  to  the  property  held,  or  the  reve- 
nue enjoyed  under  its  protection;  and  though  this 
can  never  be  arrived  at  with  accuracy,  through 
the  operation  of  any  general  rule,  and  would  not 
be  wholly  just  if  it  could  be,  experience  has  given 
us  no  better  standard,  and  it  is  applied  in  a  great 
variety  of  forms,  and  with  more  or  less  approxi- 
mation to  justice  and  equality.  But,  as  before 
stated,  other  considerations  are  always  admissible ; 
what  is  aimed  at  is,  not  taxes  strictly  just,  but  such 
taxes  as  will  best  subserve  the  general  welfare  of 
political  society." 

Benefit  as  a  measure  of  taxation  is  therefore 
according  to  the  admission  of  one  of  its  strongest 
advocates  inadequate.  Only  in  special  instances  can 
benefit  be  directly  measured.  There,  of  course,  it 
has  been  and  will  remain  the  basis  of  taxation,  at 
least  until  the  State  shall  decide  that  the  special 
benefit  has  been  merged  in  the  common  benefit. 


CHAP,  in  THE   TAX  SYSTEM  115 

SEC.  3.    But   the   faculty   theory,   while   offering 
some  difficulties,  is  on  the  whole  more  satisfactory. 
The  faculty  theory  is  well  illustrated  by   The  faculty 
the  history  of  the  English  poor  law,  to  theorv  »'#««- 

,  .   ,          /  ?    *j      i_  j        tratedbythe 

which  reference  has  already  been  made.  English  poor 
At  first  the  attempt  was  made  to  supply  law- 
the  wants  of  the  poor  by  voluntary  contributions. 
But  it  soon  became  apparent  that  all  were  not  con- 
tributing "as  God  had  prospered  them."  The  idea 
that  the  support  of  the  poor  was  a  benefit  to  the 
other  classes,  except,  perhaps,  so  far  as  almsgiving 
was  supposed  to  ensure  a  man's  salvation,  did  not 
appeal  to  the  legislators.  They  anxiously  avoided 
making  the  contribution  compulsory  because  it 
would  be  hard  to  justify  such  a  policy  by  point- 
ing to  any  benefit.  But  they  felt  that  fairness 
demanded  that  each  should  contribute  according 
to  his  ability.  Indeed,  this  was  their  understand- 
ing of  the  Divine  command  upon  which  they  were 
consciously  acting.  The  Justices  of  Peace  were, 
without  any  very  definite  instructions  as  to  the  mode 
of  procedure,  authorised  to  see  that  each  person 
contributed  fairly  according  to  his  ability.1 

What  then  constitutes  ability  ?  The  original  idea 
seems  to  have  been  that  the  possession  of  prop- 
erty constituted  ability.  But  the  value  original  idea 
of  property  depends  upon  its  power  to  °f  faculty. 
yield  the  owner  a  revenue.  If  we  consider  landed 
property  only,  we  find  historically  the  greatest  un- 
i  Ashley,  Economic  History,  II.,  p.  360. 


116         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

certainty  as  to  whether  men  should  be  assessed 
according  to  some  estimate  of  the  salable  value 
or  according  to  its  annual  yield.  This  uncertainty 
The  salable  arose  from  the  nature  ot  things.  The 

InZaipnd-  salable  value  of  landed  Property  was, 
wee.  of  course,  determined  by  the  annual 

produce  or  revenue-yielding  power.  In  the  middle 
ages  land  was  not  salable  property;  hence,  it  was 
the  custom  to  value  it  for  purposes  of  taxation 
according  to  the  annual  produce,  or  the  annual 
rental  value,  which  was  determined  by  the  produce. 
The  history  of  taxation  in  the  American  colonies 
is  very  instructive  as  to  the  method  of  determining 
what  constitutes  faculty  or  ability  to  pay.  Here 
for  the  first  time  in  history,  or  at  least  since  the  fall 
of  Rome,  was  a  country  that  enjoyed  almost  absolute 
free  trade  in  land.  When  the  Connecticut  proprie- 
tors bought  in  fee  simple  lands  in  Vermont,  which 
they  had  never  seen,  to  be  sold  again  on  the  same 
terms  to  settlers,  whom  they  had  never  seen,  often 
for  prices  which  the  same  lands  would  not  bring 
F  .  to-day,  they  were  doing  what  was  not 

land  in  New  possible  in  any  European  country  at  the 
ng  and.  time  and  what  is  only  partly  possible 
in  most  of  them  to-day,  i.e.  selling  land  as  one 
sells  wheat  or  any  other  commodity.  The  New 
England  colonists,  therefore,  had  the  choice  of  two 
methods  of  assessing  property  in  land :  they  could 
follow  the  older  method  to  which  they  were  accus- 
tomed at  home,  which  assessed  the  rental  value  of 


CHAP,  in  THE   TAX  SYSTEM  117 

the  property,  or  they  could  take  some  method  sug- 
gested by  the  fact  that  lands  were  really  sold,  in 
fee  simple,  for  a  price.  In  general  they  chose  the 
latter,  although  there  are  numerous  traces  of  the 
old  method  both  in  the  tax  laws  and  in  other  regu- 
lations that  are  of  a  similar  character.  It  is  un- 
fortunate that  none  of  the  investigations  into  the 
history  of  this  period  have  been  specially  directed 
toward  this  point.  Vermont  furnishes  one  of  the 
best  examples  of  the  principles  underlying  the  colo- 
nial ideas  of  taxation.1  There  the  conditions  were 
very  simple.  Taxation  was  intended  to  cover  all 
male  inhabitants.  Every  male  between  Taxationof 
16  and  60  years  of  age,  with  a  few  defi-  faculty  in 
nite  exceptions,  was  "rated"  at  £6  on  Vermont- 
his  person.  That  is,  everybody  was  considered 
be  able  tct  contribute  something,  whether  he  had 
property  or  not.  Then  the  different  items  of  prop- 
erty were  "set  in  the  list"  over  against  the  name 
of  the  owner  at  fixed  rates.  For  example,  each 
acre  of  improved  land,  10s. ;  an  ox  or  steer  four  years 
old  £4 ;  three  years  old,  £3;  two  years  old,  £2 ; 
one  year  old,  £1 ;  a  horse  three  years  old  or  over, 
£3;  all  " horse  kind"  two  years  old,  £2.  Money 
on  hand,  or  due,  was  listed  at  £6  in  the  £100. 
Then  all  persons  were  listed  "for  their  faculty," 
according  to  occupation  and  earnings  :  attorneys 
at  from  £50  upwards,  as  the  value  of  their  prac- 

1  Wood,  History  of  Taxation  in  Vermont.     Columbia  College 
Studies,  IV.  3. 


118         INTRODUCTION  TO  PUBLIC  FINANCE      PART  II 

tice  increased ;  all  tradesmen,  traders,  and  arti- 
ficers "proportionally  to  their  gains  and  returns." 
Other  items  of  property  were  entered  in  the  list 
in  a  similar  way  at  fixed  rates.  The  sum  total 
of  all  the  different  items  over  against  the  name 
of  each  person-  was  supposed  to  represent  his  total 
ability  or  faculty.  The  notable  thing  about  all 
this  is  that  only  revenue-yielding  property  was 
listed.  It  was  not  a  property  tax  purely,  nor  an 
income  tax.  But  the  thing  which  it  sought  to 
ascertain  was  how  much  ability  or  faculty  each 
person  had.  All  property  that  was  regarded  as 
indicative  of  faculty  was  listed,  and  many  other 
things  that  were  also  indicative  of  faculty  were 
included.  Later,  however,  Vermont  adopted  a  form 
more  nearly  in  accord  with  the  idea  that  property 
alone  indicates  faculty. 

There  are  then  two  ways  of  ascertaining  faculty. 
In  the  one  the  base  is  primarily  the  property  irre- 
Facuity  meas-  spective  of  the  revenue  the  property 
erft  orb™**  7^e^s-  ^n  *he  °^her  it  is  income  from 
income.  property  or  from  other  sources.  There 

are,  also,  two  ways  of  completing  the  measurement: 
We  may  assume  that  faculty  is  proportional  to 
property  or  income ;  that  is,  that  it  increases  in 
exactly  the  same  ratio  as  property  and  income 
increase.  Or  we  may  assume  that  it  increases  more 
rapidly  than  either  property  or  income.  The  choice 
of  base  and  the  choice  of  rate  have  given  rise  to 
long  and  weary  discussions  and  hair-splitting  dis- 


CHAP,  in  THE   TAX  SYSTEM  119 

tinctions.  In  regard  to  the  first,  it  is  sufficient  to 
say  that  at  present  the  most  widely  accepted  view 
is  that,  from  the  standpoint  of  abstract  justice, 
income  forms  a  better  starting-point  for  the  deter- 
mination of  faculty  than  property.  But  we  cannot 
avoid  entering  the  discussion  as  to  whether  faculty 
is  in  proportion  to  income  or  increases  Faculty  in- 
more  rapidly.  The  widespread  advance  cr^as^s  ™<>™ 

rapidly  than 

of  democracy,  and  of  sympathy  for  those  property  or 


in  the  lower  walks  of  life,  led  to  the 
desire  to  justify  if  possible  the  exemption  of  smaller 
incomes,  especially  the  minimum  of  subsistence,  and 
this  desire  found  means  of  fulfilment  in  the  newer 
theories  of  value,  the  conception  of  final  utility,  and 
the  discussion  as  to  the  relative  urgency  of  different 
wants.  If  we  classify  certain  wants  as  absolute 
necessities,  then  the  conclusion  is  near  that  the 
possessor  of  the  minimum  of  subsistence  has  no 
ability  to  pay  taxes.  The  possessor  of  a  great  deal 
more  than  the  minimum  of  subsistence  can  in  pro- 
portion bear  more  taxes  than  one  who  has  only 
enough  to  obtain  a  few  comforts  in  addition  to  the 
necessities.  That  is,  the  test  of  justice  is  found  in 
equality  of  sacrifice,  and  we  impose  a  greater  sacri- 
fice if  we  take  away  from  the  labouring  man  with 
$1500  a  year  10  per  cent  of  his  income,  than  we  im- 
pose on  the  capitalist  with  $  15,  000  annual  income  by 
taxing  him  in  the  same  proportion.  Moreover,  if  we 
look  upon  faculty  as  identical  with  general  economic 
power,  then  it  is  clear  that,  as  the  control  of  wealth 


120         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

increases,  the  ease  of  further  increase  is  greater. 
Thus  it  is  easier  relatively  for  the  millionaire  to 
double  his  fortune  than  it  is  for  the  daily  wage- 
earner  to  rise  to  independence. 

SEC.  4.    There  are  two  other  theories,  which,  inde- 
pendent  of    the   idea   of   sacrifice   or   of   increased 
The  compen-     economic    power,    attempt   to    justify   a  / 
satoryand       higher  rate   of   taxation   for  higher  in- 

socialistic  the- 
ories, comes  than  for  lower.  These  two  the- 
ories adopt  the  hypothesis  that  the  common  benefit 
is  equal,  and  demand  that  the  inequalities  in  wealth 
should  be  removed  in  order  to  make  it  easily  possi- 
ble to  tax  according  to  this  equal  benefit.  There 
are,  first,  those  who  argue  that  the  inequalities  in 
wealth  are  due  in  large  measure  to  the  action  of  the 
State,  and  hence  the  State  is  justified  in  abandoning 
the  idea  of  equality  of  taxation  and  in  taxing  those 
who  have  much  wealth  more  heavily  than  others, 
for  they  have  gained  from  the  State's  own  action. 
This  has  been  called  the  compensatory  theory. 
Others,  again,  starting  from  the  same  hypothesis, 
urge  that  taxation  cannot  be  equal,  because  evil 
economic  forces  have  changed  the  abilities  of  the 
tax-payers  and  that  it  is  the  duty  of  the  State  to 
offset  these  forces  by  readjusting  wealth  through 
taxation.  This  has  been  called  the  socialistic  the- 
ory. Neither  of  these  theories  can  justly  be  called 
scientific  ;  they  both  cut  loose  entirely  from  existing 
conditions. 

We  cannot  within  the  limits  of  this  work  attempt 


CHAP,  in  THE   TAX  SYSTEM  121 

an  exhaustive  criticism  of  all  the  different  theories 
as  to  justice  in  taxation.  Indeed,  we  have  already 
exceeded  the  limits  of  pure  scientific  inquiry.  But 
the  conclusions  reached  by  Professor  c  ,. 

aeligman  s 

Seligman  after  an  exhaustive  study  of  conclusions  as 
all  the  different  theories  are  too  impor-  *>P">gres»ion. 
tant  to  be  omitted.1  He  finds  the  benefit  theory, 
like  the  socialistic  and  compensatory  theories,  wholly 
inadequate.  But  the  faculty  theory  is  satisfactory 
ancf  seems  to  him  to  justify  a  moderate  progression. 
Greater  faculty  is  represented  by  the  higher  income: 
(1)  because,  after  the  initial  disadvantages  have  been 
overcome,  it  is  easier  to  acquire  more  ;  (2)  because 
the  sacrifice  of  the  same  proportion  of  the  larger 
income  is  less  thaft  in  the  smaller  income.  Neither 
of  these  reasons  suggests  a  definite  rate  of  progres- 
sion. He  says  :  "  If  therefore  we  sum  up  the  whole 
discussion,  we  see  that  while  progressive  taxation 
is  to  a  certain  extent  defensible  as  an  ideal,  and  as 
the  expression  of  the  theoretical  demand  for  the 
shaping  of  taxes  to  the  test  of  individual  faculty,  it 
is  a  matter  of  considerable  difficulty  to  decide  how 
far  or  in  what  manner  the  principle  ought  to  be 
actually  carried  out  in  practice." 

It  would  seem,  then,  that,  in  general,  faculty  is  the 
ideal  base  of  taxation ;  that  faculty  can  be  meas- 
ured either  by  property  or  by  income,  but  best  by 
the  latter ;  that  faculty  increases  somewhat  pro- 
gressively and  is  affected  by  the  consideration  of 
1  Prog.  Tax.  in  Theory  and  Practice,  pp.  190  ff. 


122        INTRODUCTION  TO  PUBLIC  FINANCE       PART  n 

relative  conditions,  as  the  kind  of  property,  the 
source  of  the  income,  or  the  burdens  already  resting 
Modifying,  uPon  the  individual  or  property.  All 
relative  con-  these  considerations  have  to  be  applied 
in  determining  whether  the  tax  system 
of  any  country  complies  with  the  rules  of  justice. 
They  do  not  apply  with  the  same  strictness  to  the 
separate  taxes.1 

1  The  recognition  of  the  principle  of  progression  in  the  recent 
reforms  of  taxation  is  very  marked.     See  Seligman,  Essays,  305  ff. 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  123 


CHAPTER  IV 

THE  DEVELOPMENT    OF   TAXATION    BEFORE  THE 
INDUSTRIAL  REVOLUTION 

SECTION  1.  Feudalism  placed  a  large  number  of 
economic  receipts  directly  in  the  hands  of  the  rulers. 
These  receipts  were  generally  sufficient  Taxesnot 
for  the  discharge  of  the  customary  pub-  found  under 
lie  activities.  It  is  a  mistake,  therefore,  feudahsm- 
to  search  for  taxes  proper  in  the  period  of  the 
supremacy  of  feudalism;  that  is,  from  the  capitulary 
of  Charles  the  Bald,  877,  to  the  end  of  the  thirteenth 
century.  Taxes  begin  to  emerge  with  the  transfor- 
mation of  feudal  rights  and  dues,  the  commutation 
of  obligatory  military  services,  and  the  like  into  pay- 
ments in  kind  or  in  money.  Greek  and  Roman 
forms  of  taxation  had  even  less  influence  on  modern 
systems  of  taxation  than  Greek  and  Roman  forms  of 
expenditure  on  modern  spending.  For  the  study  of 
Roman  law  and  the  traditions  of  the  glory  of  the 
Roman  Empire  determined  many  State  activities  that 
involved  the  spending  of  public  wealth.  But  new 
methods  of  obtaining  the  funds  were  devised.  Infor- 
mation concerning  the  taxes  of  the  period  from  the 
fall  of  Rome  to  the  capitulary  of  Charles  the  Bald  is 
rather  meagre  and  too  vague  to  be  of  much  value. 


124         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

The  first  taxes  to  emerge  from  the  darkness  of 
this  period  are  a  number  of  fee-like  contributions  of 
_,  .  .  the  nature  of  commuted  feudal  services, 

Midrly  taxes 

were  commut-    or  directly  connected  with  feudal  rights, 

edfeudaldues.    certain  market  <Jues  an(J  customs  duties, 

tolls  for  protection  to  travellers,  for  the  use  of  roads, 
bridges  and  ferries,  and  two  forms  of  property  taxes, 
land  taxes  and  family  taxes.  The  land  taxes  of  this 
period  are  just  emerging  from  the  character  of  rent 
payments  and  acquire  only  by  degrees  the  features 
of  pure  taxes.  Even  in  the  case  of  land  left  to  the 
original  possessors  after  conquest,  the  payments  de- 
manded are  more  of  the  character  of  rents  than  of 
taxes.  But  the  combination  of  these  charges  with 
hearth  or  family  taxes  leads  to  the  formation  of  a 
sort  of  mixed  property  and  personal  taxes.  The  fact 
that  land  is  practically  the  only  kind  of  revenue 
yielding  property  and  that  no  considerable  earnings 
are  made  without  the  use  of  land  makes  this  tax  suf- 
ficiently universal  for  the  demands  of  justice. 

Direct  taxes  are  in  this  period,  as  in  classical  times, 
never  paid  by  the  freeman.  They  are  regarded  as 
The  freeman  derogatory  and  as  the  badge  of  a  servile 
exempt.  position.  The  freeman  could  give  his 

services  to  the  State,  he  could  risk  his  life  for  it,  but 
he  would  regard  it  as  a  deadly  insult  if  he  were 
asked  to  pay  taxes.  Indirectly,  of  course,  he  was 
taxed,  as,  for  example,  when  he  bought  merchandise, 
for  permission  to  sell  which  the  trader  was  taxed. 

As  soon,  however,   as  industry  began  to  develop, 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  125 

as  soon  as  the  crafts  sprang  up  in  the  cities  which 
clustered  around  the  market-places,  and  classes  which 
had  lived  in  part  from  industrial  pursuits  found  it 
possible  to  obtain  so  wide  a  market  that  they  could 
live  entirely  from  their  industry,  then,  there  arose 
such  a  differentiation  of  the  sources  of  wealth  that 
the  old  forms  of  taxation  were  insufficient.  Tax- 
ation had,  therefore,  to  be  extended  to  Taxation  ex- 
meet  the  new  forms  of  wealth.  The  first  ^^J^ 
methods  of  taxing  these  were  dictated  wealth. 
solely  by  expediency  and  the  desire  of  obtaining  as 
large  revenues  as  possible,  rather  than  by  any  defi- 
nite ideas  of  justice,  and  were  mainly  indirect  in 
character  and  partly  an  extension  of  the  older  market 
dues,  excises,  customs,  and  tolls,  together  with  new 
taxes  of  the  same  kind. 

Of  old  Roman  taxes  none  can  be  strictly  said  to 
have  survived  the  conquest.  Some  lasted  through- 
out the  Merovingian  period  in  a  greatly  changed 
form.  Finally  they  were  merged  into  various  feudal 
payments,  and  took  on  the  nature  of  rents.  A  few 
relatively  insignificant  market  dues  and  fees  con- 
stitute the  only  taxes  which  regularly  formed  a  part 
of  the  revenues  of  the  State  or  of  the  State's  officers, 
the  feudal  lords.  The  regular  feudal  burdens,  while 
economic  in  character  and  not  fiscal,  Feudal  dues 
really  fill  the  place  of  the  later  direct  S°r™aburden 

J  as  heavy  as 

taxes.     In  proportion  to  the  prosperity  taxes. 

of  the  people  they  were  certainly  as  heavy  as  any 

modern  systems  of  taxes.     The  rapid  disintegration 


126         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

of  the  German  Empire  into  smaller  territorial  lord- 
ships after  the  sixteenth  and  seventeenth  centuries, 
rendered  the  question  of  imperial  taxation  at  once 
less  pressing  and  more  complicated.  On  some  eleven 
different  occasions,  according  to  Wagner,  between 
1427  and  1550  the  Empire  as  such  stood  in  need  of 
extra  revenues,  for  purposes  so  clearly  of  common 
benefit  as  to  justify  a  demand  for  common  contri- 
!  The "  com-  butions.  Such  an  instance  is  that  of 
/mon  penny."  the  Hussite  and  Turkish  wars.  The 
tax  used  was  the  "common  penny."  This  direct 
imperial  tax  was  a  mixture  of  poll  and  personal 
taxes  with  income  and  property  taxes.  We  find 
very  similar  taxes  in  France  and  England.  It  fell 
upon  all  imperial  subjects,  whether  holding  from  the 
crown  or  not,  provided  they  held  property.  The 
rate  was  an  irregular  regressive  one,  being  smaller 
for  all  above  a  certain  amount  of  property.  It  was 
very  badly  administered  and  not  universally  col- 
lected.1 

In  the  German  principalities  that  were  formed  out 

of  the   German   Empire  the  first  direct  taxes  were 

the  bedes.     These  were  extra  payments, 

'    The  "bedes."  .      *  J  ' 

similar  in  form   to   the   existing  feudal 

contributions.  They  were  made  by  those  already 
paying  such  dues  and  were  measured  in  somewhat 
similar  ways.  The  basis  was  generally  landed  prop- 
erty. The  first  bedes  were  more  or  less  voluntary, 
private  contributions  for  the  support  of  the  Vogt, 
1  Cf.  Wagner,  Schonberg's  Handbuch,  3d  ed.,  III.,  184, 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  127 

count,  or  lord  for  some  recognised  public  purpose. 
By  contracts  entered  into  between  the  contributors 
and  the  lords,  they  became  compulsory  and  formed 
part  of  the  regular  income  of  the  lords,  who  then  in 
extraordinary  cases  of  need  would  again  come  for- 
ward with  the  demand  for  extra  or  "necessity" 
bedes.  This  was  frequently  done  in  times  of  war. 
Hence,  these  bedes  were  often  called  "  army  ledes" 
Some  of  these  in  turn  became  customary  or  fixed. 
With  the  rise  of  the  idea  of  public  life  and  public 
needs,  the  bedes  easily  became  compulsory  public  con- 
tributions, and  were  regarded  as  distinct  from  the 
feudal  dues,  which  by  virtue  of  longer  standing  and 
the  absence  of  a  recognised  public  purpose  were 
treated  as  the  private  revenues  of  the  prince.  A 
peculiarity  of  the  earlier  assessments  of  the  bedes  was 
the  method  of  apportionment  to,  or  assumption  by, 
the  different  orders  or  cities  of  a  certain  lump  sum, 
which  was  then  distributed  by  their  own  rulers 
among  the  different  members,  according  to  some 
measure  agreed  upon.  Prelates,  clergy,  "Donative  r/ 
and  knights  were  exempt  from  the  ordi-  monies." 
nary  bedes.  They  sometimes  rendered  similar  con- 
tributions, hedging  themselves  in  with  all  sorts  of 
reserves  and  precautions,  to  prevent  the  payments 
becoming  regular.  These  were  called  "donative 
monies." 

It  was  in  the  cities  that  retained  a  large  degree 
of  political  independence  that  the  highest  develop- 
ment of  the  fiscal  system  was  to  be  found  in  the 


.128         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

middle  ages.  This  is  owing  to  the  fact  that  they 
were  in  advance  of  the  rest  of  the  country  in  their 
Hi  h  develo  economic  development.  Long  before  the 
ment  of  city  principalities  were  able  to  abandon  pay- 
ments in  kind  and  services,  the  cities 
were  collecting  taxes  in  money,  making  some  use  of 
public  credit  and  developing  regular  fiscal  offices. 
"  The  art  of  taxation,"  says  Wagner,1  "  the  use  of 
public  credit,  and  the  practical  organisation  of  the 
financial  administration  in  the  cities  had  been  an 
important  part  of  public  institutions  for  centuries 
before  the  territorial  State  had  even  recognised  the 
need  of  such."  This  field  has,  however,  not  yet 
received  the  attention  of  historical  investigators 
sufficiently  to  allow  us  to  draw  conclusions  as  to 
the  generally  prevailing  forms.2 

SEC.  2.  In  France  the  early  growth  of  a  strong 
central  power  led  to  an  intensification  and  sharp 
differentiation  of  the  royal  feudal  dues  from  the 
other  feudal  charges,  which  gives  them  something 
Royal  feudal  the  character  of  taxes.  But  inasmuch 


dues  in  as   the    French   State   was   peculiarly  a 

France  not 

properly  proprietary  State,  and  the  territory  was 

taxes.  rather  a  part  of  the  private  property  of 

the  king  than  public  property  in  the  modern  sense, 
these  early  charges  are  not  taxes  proper,  but  rents, 
or,  to  use  the  more  general  term,  feudal  dues.  But 
the  rapid  growth  of  the  central  power,  and  the  high 

1  Schonberg's  Handbuch,  3d  ed.,  III.,  185. 

2  See  Schonberg's  "  Investigations  into  the  City  of  Basel." 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  129 

development  of  public  needs  in  the  kingdom,  neces- 
sitated more  revenues.  These  needs  were  at  first 
met  by  the  collection  of  indirect  consumption  and 
trade  taxes.  The  tendency  toward  the  development 
of  indirect  taxes  grew  apace  after  the  seventeenth 
century.  The  mercantile  theory,  which  was  su- 
preme for  most  of  the  time  after  Colbert,  developed 
customs  duties  very  highly,  and  these  ran  par- 
allel with  internal  consumption  taxes.  In  the 
eighteenth  century  there  were  three,  or  possibly 
four,  important  taxes  which  had  grown  up  in  vari- 
ous ways  out  of  the  feudal  dues.  These  were  the 
"taille"1  (tallage),  the  "  vingtiemes"  (twentieths), 
the  "capitation"  (poll),  and  possibly  the  "dimes" 
(tithes).2 

The  taille  is  of  feudal  origin.  Originally  it  was 
arbitrarily  assessed  with  extreme  rigour  upon  the 
serfs  by  the  lords,  and  occasionally  upon  the  great 
vassals  by  the  king  with  the  assent  of  the  peers.  It 
became  a  permanent  charge  when  royal  power  was 

1  The  term  "teiZZe,"  in  English,  tallage,  also  spelled  talliage,  tail- 
age,  and  taillage,  is  from  a  root  meaning  to  cut.     It  is  explained  as 
derived  from  the  general  method  of  keeping  accounts  by  means  of 
notched  sticks.     A  taille  was  any  sum  of  which  account  was  kept, 
then  the  amount  scored  up  (tallied)  against  any  person.     Slender 
sticks  with  notches  called  "tally  sticks"  were  used  by  the  English 
exchequer  for  accounts,  until  abolished  by  the  statute  of  23  Geo. 
•III.,  c.  82.     Similarly,  the  German  "Kerbe,"  tally  sticks.     Other 
roots  meaning  to  cut  are  common  in  the  names  of  various  taxes : 
viz.,  incisio,  incisura,  cise,  later  accise,  adcisio,  Eng.  excise;  in 
these  Latin  roots  the  thought  is,  that  a  part  of  the  taxed  article  is 
cut  out  for  the  government. 

2  See  Vignes,  Ed.,  Traite  des  Impots  en  France,  1872,  p.  10. 


130         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

firmly  established  on  the  ruins  of  feudalism.  Charles 
VIII.  made  it  permanent  at  the  same  time  with  the 
establishment  of  the  royal  army.  The 
faille  was  both  real  and  personal.  On 
the  one  side  it  was  based  on  the  revenue  from  landed 
property ;  on  the  other,  it  was  based  on  the  faculty 
of  the  tax-payer,  measured  by  the  revenues  from  his 
landed  property,  and  active  rents,  as  well  as  the  prod- 
ucts of  his  own  industry.  This  tax,  suppressed  in 
1790,  yielded  44,737,800  livres  the  year  before. 
Necker  obtained  91,000,000  livres  from  it.  Nobles 
and  clergy  were  exempt. 

The  vingtiemes  consisted  of  one  or  more  twentieth 
parts  of  the  revenues  from  either  landed  or  movable 
property.  This  tax  had  a  varied  history.  At  first 
it  was  used  with  the  tattle,  but  when  that  tax  was 
Thevingti-  made  permanent  under  Charles  VIII. 
emes.  ^he  mngtieme  disappeared.  It  was  re- 

vived in  1710  by  Louis  XIV.  as  a  war  tax.  It 
remained  as  the  occasional  resource  of  the  treasury 
up  to  the  Revolution.  Only  the  clergy  were  ex- 
empt. It  produced  46,000,000  livres  (Necker  55,- 
000,000). 

The  capitation,  or  system  of  poll  taxes,  was  the 
variable  tax  of  the  ancient  monarchy.  It  dates 
The  capita-  from  1695.  It  was  at  first  regarded  as  a 
tion-  temporary  expedient,  but  was  continued 

to  the  Revolution.  It  was  assessed  according  to  a 
tariff  of  twenty-two  classes.  But  the  base  was  fre- 
quently changed.  The  clergy  were  exempt,  the 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  131 

nobles  were  taxed  on  the  basis  of  their  presump- 
tive ability,  and  those  who  paid  the  taille  were 
taxed  according  to  the  amount  of  that  tax  they 
paid.  In  1786  it  yielded  41,500,000  livres. 

The  dime,  or  tithe,  was  an  assessment  paid  in  kind  j 
from  the  fruits  of  the  soil  for  the  benefit  of  the' 
clergy.      The   tax  was   not   always   the 

*J  The  dime. 

tenth,  but  varied  from  one-seventh  to 
one  thirty-second.  The  ecclesiastical  purpose  of 
this  payment  has  led  some  to  refuse  to  call  it  a 
tax  in  the  strict  sense.  Since  the  church  exercised 
a  power  that  differed  little  from  that  of  the  State 
and  the  burden  was  a  regular  one  maintained  for  a 
public  purpose,  it  should  probably  be  called  a  tax. 

The  corve'es  were  more  strictly  taxes  than  the 
dimes.  These  were  personal  services  applied  to  the 
construction  of  the  roads  and  other  pub- 

Thecorvees. 

lie  works.  They  were  regarded  as  feu- 
dal dues.  They  were  of  two  kinds :  the  first  were 
levied  on  property  and  rendered  by  the  proprietor  for 
his  lands,  and  the  second  were  levied  on  persons  and 
rendered  by  all  irrespective  of  land-holding.  The 
nobles  and  the  aliens  were  not  subject  to  the  per- 
sonal carve es.  The  clergy  could  commute  them  into 
money  payments  or  have  them  rendered  at  their  own 
cost.  The  land  corvSes  were  due  from  all  hereditary 
proprietors  irrespective  of  rank,  but  they  were  not 
bound  to  furnish  them  in  person.  Louis  XVI.  sup- 
pressed the  corvSes  in  1776,  but  they  were  re-estab- 
lished. They  disappeared  in  1793. 


132         INTRODUCTION  TO  PUBLIC  FINANCE     PART  H 

The  most  important  indirect  consumption  taxes 
were  leased  for  166,000,000  livres,  and  those  collected 

indirect  con-  ^7  ^e  government  were  51,500,000  livres. 
sumption  These  together  nearly  equalled  the 
revenue  from  direct  taxes.  The  indi- 
rect taxes  of  the  ancient  monarchy  were :  first,  the 
aides,  which  consisted  of  taxes  on  drinks,  on  articles 
of  gold  and  silver,  on  iron,  oil,  skins,  starch,  bills, 
paper,  etc.,  and  the  octrois,  levied  at  the  city  gates 
on  all  sorts  of  goods  when  brought  into  the  towns ; 
second,  the  gabelle,  or  salt  tax,  which  was  so  ar- 
ranged as  to  amount  practically  to  a  direct  tax. 
^or  the  people  were  obliged  to  buy  each  year  from 
the  management  of  the  monopoly  an  amount  of  salt 
determined  in  each  case  by  the  size  of  the  family. 
There  was  a  similar  "  salt  conscription  "  in  Germany. 
Thirdly,  there  was  the  tax  on  tobacco. 

SEC.  3.  In  England1  we  find  in  Anglo-Saxon 
times  three  principal  taxes  :  (1)  The  ship-geld,  a  tax 
Early  English  imposed  on  each  shire,  in  proportion  to 
taxes.  the  number  of  hundreds  it  contained,  for 

naval  purposes.  (2)  The  tribute-like  "  Danegeld " 
was  levied  after  991  at  so  much  a  hide  (piece  of 
land)  and,  after  the  cessation  of  the  original  cause, 
was  collected  by  the  kings  as  private  revenue. 
(3)  The  "fumage,"  or  tax  of  smoke  farthings,  a 
hearth  tax.  This  seems  to  have  been  a  traditional 
form  of  tax  with  the  Saxons. 

In  Norman  times,  the  feudal  character  of  the  gov- 
1  See  Dowell,  History  of  Taxation  and  Taxes  in  England. 


CHAP,  iv  DEVELOPMENT.   OF  TAXATION  133 

eminent  was  such  that  it  obtained  revenues  from 
the  demesne,  from  feudal  dues,  and  from  the  royal 
prerogatives  so  great  that  no  real  taxes  exist.  The 
Danegeld  was  levied  by  the  Conqueror  as  an  annual 
tax,  but  disappeared  after  1163. 

With  the  reign  of  Henry  II.  came  a  more  ordered 
and  regular  system  of  taxation.  This  began  with 
the  well-known  commutation  of  the  mili-  ~ 

Commutation 

tary  obligations  of  tenants.  It  was  due  of  military 
to  the  continental  position  of  the  Ange-  s 
vin  kings.  The  distance  at  which  war  was  waged 
and  the  length  of  service  demanded  rendered  the 
military  obligations  particularly  burdensome,  and 
tenants  were  anxious  to  commute  them.  An  army 
of  mercenaries,  too,  suited  the  king  better,  as  easier 
to  control  than  the  feudal  army.  Hence  arose  the 
commutation  of  the  duty  to  foreign  service  into  a 
money  payment  of  two  marks,  <£!  6s.  8cZ.,  on  each 
fee  of  .£20,  known  as  the  "scutage."  Henry  II.  col- 
lected three  such  scutages,  and  this  tax  did  not 
fall  into  disuse  until  after  1322.  It  was  practically 
a  land  tax,  levied  each  time  for  a  special  purpose. 
The  tallage  in  England  was  the  tax  that,  was  col- 
lected from  the  tenants  on  the  royal  demesne  on 
occasions  of  unusual  expense.  Those 

•j    ^      i  .  j  u  The  tallage. 

who  paid  the  hidage  or  Danegeld  were 
generally  exempt.     Cities  and  towns  not  exempt  in 
this  way  paid  the  auxilium  or   aid.     The   tenants 
were  liable  for  these  taxes  up  to  one-tenth  of  their 
goods.     In    the    city   of    London    the   tallage    was 


134         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

treated  as  a  "benevolence."  It  was  superseded 
after  Edward  III.  by  the  general  taxes  on  mova- 
bles. 

The  taxes  on  movables  began  with  the  "  Saladin 
tithe  "  in  1188.  It  was  one-tenth  of  rent  and  mov- 

Thebegmninff    ableS  Pald  b?  a11  e^P*  Crusaders.       Out 

of  taxes  on  of  this  insignificant  beginning  grew  a 
system  of  taxes  on  movables  which  finally 
included  all  the  taxes  so  far  mentioned.  Richard  I. 
levied  a  tax  on  all  ploughed  land  in  1194,  known  as 
the  "  carucage,"  from  the  area  upon  which  it  was 
levied,  namely,  the  amount  of  land  that  could  be 
covered  by  one  plough  (caruca)  in  a  season.  After 
1224,  this  was  merged  in  the  tax  on  movables. 

The  tax  on  rents  and  movables,  which  began,  as  we 
saw,  with  the  Saladin  tithe,  was  continued  from  1189 
The  "thir-  to  1334.  This  was  a  grant  of  one-thir- 
teenths  and  teenth  in  1207,  one-fifteenth  in  1225,  one- 
Wtamtiu."  fortieth  in  1232,  one-thirtieth  in  1237, 
one-fifteenth  in  1275.  Up  to  1283,  the  method  of 
obtaining  the  grant  was  by  separate  negotiations 
with  each  section  of  the  country.  But  after  that 
date,  general  grants  were  made  by  Parliament  and 
other  taxes  were  discontinued. 

Besides  these  direct  taxes,  the  crown  had  the 
privilege  of  taking  "  customary"  tolls  upon  merchan- 
Customs  dise  imported  or  exported.  Hence  our 
duties.  modern  term,  "customs  duties."  These 

tolls  were  of  the  character  of  licenses  and  protec- 
tion money.  Their  early  history  is  obscure.  Be- 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  135 

fore  the  Magna  Charta  they  had  become  so  fixed 
and  regular  as  to  call  forth  the  well-known  clause 
of  that  historical  document :  "  Let  all  merchants 
have  safety  and  security  to  go  out  of  England,  to 
come  into  England,  and  to  remain  in  and  go  about 
through  England,  as  well  by  land  as  by  water,  for 
the  purpose  of  buying  and  selling,  without  the  pay- 
ment of  any  evil  or  unjust  tolls,  on  the  payment  of 
the  ancient  and  just  customs"  (sine  omnibus  malis 
toltis,  per  antiquas  et  rectas  consuetudines) .  In 
1275  these  "ancient  customs,"  slightly  raised,  were 
granted  Edward  I.  by  Parliament.  The  chief  duties 
were  on  wine  imported  and  wool  exported  and  a 
poundage  on  all  other  goods  imported  or  exported. 
From  1334  to  1453  there  are  a  number  of  changes 
to  note.  The  fifteenths  and  tenths  were  appor- 
tioned among  the  communities,  cities,  and  boroughs, 
the  townships  and  the  demesne  tenants,  The^^ 
in  1334,  and  the  assessment  then  made  teenthsand 
remained  the  basis  of  taxation.  The  * 
tax  thus  became  a  fixed  charge.  It  varied  in 
rate  from  one-half  a  fifteenth  and  tenth,  to  two  fif- 
teenths and  tenths,  as  the  need  for  revenues  might 
change.  Sometimes  no  such  grant  was  made.  In 
1377  Parliament  granted  to  the  king  a  tax  of  "  four 
pence,  to  be  taken  from  the  goods  of  each  person  in 
the  kingdom,  men  and  women,  over  the  j%e  « tailage 
age  of  fourteen  years,  except  only  real  of  groats." 
beggars."  This  was  known  as  the  "  tailage  of 
groats."  Subsequently  a  classified  poll  tax  was 


136         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

employed,  in  which  an  attempt  was  made,  by  the 
arrangement  of  the  payers  into  classes  and  a  grada- 
tion of  the  rates,  to  get  a  larger  return  by  taking 
advantage  of  the  greater  wealth  of  certain  classes. 
In  1379  this  yielded  <£25,000,  which  was  only  slightly 
more  than  the  previous  tallage  of  groats.  The 
clergy  were  included  in  both  these  taxes.  After  the 
peasant  revolt  return  was  made  to  the  fifteenths  and 
tenths.  From  1382  the  landowners  take  the  whole 
burden  of  the  old  "fifteenth  and  tenth."  In  1435 
this  was  supplemented  by  a  graduated  tax  on  in- 
come from  lands,  rents,  and  annuities,  and  offices  of 
freehold.  In  the  reign  of  Edward  III.  the  customs 
yielded  large  returns.  They  consisted  as  before  of 
tunnage  on  wine,  customs  on  wool  and  leather,  and 
poundage  on  all  other  merchandise.  The  popu- 
larity of  Edward  IV.  enabled  him  to  add  to  his  other 
sources  of  revenue  the  "benevolences,"  demands 
"Benevo-  on  the  ficn  f°r  special  contributions. 
fences."  Throughout  the  history  of  taxation  in 

England  the  grant  of  monopolies  of  new  industries 
was  made  a  source  of  income  to  the  government. 
The  multiplication  of  these  under  Elizabeth  did  not 
yield  much  revenue,  although  it  gave  rise  to  much 
discontent. 

There  is  little  in  the  varied  application  of  these 
taxes  that  is  important  as  showing  the  line  of  de- 
velopment until  the  seventeenth  century.  At  that 
time  they  proved  unequal  to  the  task  of  meeting  the 
growing  needs  of  the  treasury.  The  chief  auxiliary 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  137 

lay  in  the  extension  of  the  indirect  consumption 
taxes.  The  year  1692  (revision,  1697)  saw  the 
establishment  of  a  permanent  land  tax.  Theperma- 
This  grew  out  of  the  apportionment  of  nent  land  tax. 
the  "  fifteenths  and  tenths."  It  became  a  fixed 
charge  on  land,  a  real  burden,  not  having,  as  time 
went  on,  any  definite  relation  to  the  income  from 
land.  In  1798  Pitt  made  this  redeemable,  a  privi- 
lege which  has  been  taken  advantage  of  to  the  ex- 
tent of  removing  half  the  charge  from  the  lands. 
In  its  operation  it  is  rather  a  rent  than  a  tax. 

The  wars  of  the  period  of  the  French  Revolution 
and  the  consequent  need  of  revenue  introduced  the 
general  income  tax  (1798,  1802,  1803,  The  income 
1806).  This  tax  was  no  departure  in  tax- 
principle  from  the  older  taxes,  although  a  departure 
in  method.  It  has  been  well  characterised  as  a  com- 
bination of  several  taxes  into  a  system  which  has  for 
its  aim  the  proportional  taxation  of  all  incomes,  with 
the  exemption  of  a  certain  fixed  sum  (digressive). 
•The  form  which  it  took  in  1803  is  the  best  to  study. 
Two  separate  acts  were  passed,  the  one  taxing  all 
incomes  from  holdings  of  real  estate,  rents,  and  pub- 
lic salaries  at  the  source ;  that  is,  so  far  as  possible 
the  tax  was  deducted  before  the  revenues  passed 
into  the  hands  of  the  recipient.  The  second  taxed 
industrial  earnings  and  interest  On  capital  on  the 
basis  of  a  declaration  by  the  tax-payer.  The  tax 
began  with  an  income  of  X60  (later  .£50),  and  this 
amount  could  be  deducted  from  all  incomes  below 


138         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

XI 50  ;  after  that  the  full  rate  was  paid.  Each  per- 
son was  required  to  declare  his  whole  income  and 
could  claim  reimbursement  for  any  tax  stopped  at 
the  source  if  he  could  show  that  his  total  income 
was  below  the  minimum.  This  tax,  set  aside  in 
1816,  was  restored  in  1842,  as  a  substitute  for  the 
indirect  taxes,  removed  in  consequence  of  the  de- 
mand for  commercial  freedom.  The  rate  is  changed 
from  time  to  time  as  the  needs  of  the  government 
change. 

SEC.  4.  Local  taxation  in  England  has  been 
partly  independent  of  royal  taxation.  England 
has  not  followed  the  continental  plan  of  collecting 
revenues  for  local  purposes  in  the  form  of  additions 
The  poor  rate,  to  the  national  taxes.  While  the  weight 
the  prototype  Q£  natjonai  taxation  fell  upon  customs 

of  local  taxes 

in  England,  duties,  excises,  and  certain  direct  taxes, 
measured  roughly  by  income,  local  taxation  was 
based  exclusively  upon  revenues  from  real  estate. 
The  prototype  of  all  local  taxation  was  the  poor 
rate.  Previous  to  the  reign  of  Elizabeth  local  ac- 
tivities were  of  such  a  character  that  they  could 
be  discharged  from  feudal  dues.  In  the  manorial 
villages  and  the  boroughs  with  semi-feudal  guild, 
and  close  corporation  governments,  which  owned 
landed  property,  feudal  incomes  paid  the  few  public 
expenses.  But  the  removal  of  the  monasteries,  hos- 
pitals, and  other  charitable  foundations,  threw  upon 
public  charity  a  number  of  well-developed  paupers ; 
and  the  rapidly  changing  character  of  industry  and 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  139 

of  economic  life  constantly  gave  rise  to  the  problem 
of  what  to  do  with  the  unemployed,  who  at  times 
became  very  numerous.  The  result  was  the  famous 
poor  law  of  1601.  The  principle  of  the  tax  for  the 
support  of  the  poor  had  been  of  slow  growth.  In 
the  reign  of  Henry  VIII.  the  giving  of  alms  was 
prohibited,  and  collections  for  the  impotent  poor  of 
the  parish  were  required  to  be  made  in  each  church. 
In  1547  the  Bishops  were  authorised  to  prosecute 
all  persons  who  refused  to  contribute  for  this  'pur- 
pose, or  should  dissuade  others  from  contributing. 
In  the  fifth  year  of  Elizabeth  the  Justices  of  Peace 
were  made  judges  of  what  constituted  a  reasonable 
contribution  for  this  purpose.  After  1572  regular 
compulsory  contributions  were  levied.  Out  of  a 
purely  voluntary  contribution  then,  there  emerged 
in  two-thirds  of  a  century  a  compulsory  tax.  The 
basis  of  this  tax  was  the  annual  rental  value  of 
real  property.  The  tax  was  collected  not  from  the 
owner  but  from  the  occupier.  Most  of  the  other 
taxes  for  local  purposes  which  have  developed  in 
England  since  then  are  of  the  same  general  char- 
acter. They  are  too  numerous  to  mention  here. 
Besides  the  direct  taxes,  there  were  a  few  indirect 
ones,  market  dues,  road  tolls,  coal  and  wine  duties. 
SEC.  5.  In  the  American  colonies  we  Peculiar  con- 
meet  with  entirely  new  conditions.  Pub-  *ittonf  in  the, 

American  col- 

lie  needs  were  simple  and  few,  and  were  onies. 
mostly  local  in  character.     Customs  duties  were  for 
the  most  part  controlled  by  the  mother  country  in 


140          INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

the  interests  of  her  general  colonial  policy.  So  the 
colonists  were  driven  to  other  forms  of  taxation. 
Practically  free  trade  in  land  existed.  Land  at  a 
known  selling  value  early  formed  a  large  part  of 
the  property  of  each  citizen,  and  differed  in  no 
essential  particular  from  his  other  property.  There 
were  in  some  colonies,  to  be  sure,  charges  of  a  feudal 
nature  known  as  quit  rents,  which  were  a  recogni- 
tion of  the  king's  interest  in  the  land. 
These  never  became  of  fiscal  importance, 
and  never  developed  into  taxes.  Nor  do  they  seem 
to  have  ever  seriously  modified  the  essentially  free 
character  of  land-owning,  since  they  were  so  irregu- 
larly and  meagrely  collected.  They  were  "  acknow- 
ledgments His  Majesty  receives  of  the  People's 
Tenure  and  Subjection."1  At  times  they  devel- 
oped into  an  apparent  tax  on  certain  lands.  They 
seldom  formed  a  part  of  the  revenues  of  the  colonial 
treasuries,  being  generally  payable  to  the  king.2 

Just  as  there  were  three  different  forms  of  gov- 
ernment among  the  colonies,  so  there  were  in  the 
The  New  beginning  three  different  tendencies  in 

onpllpt'tT  taxation-3  New  England  began  with  a 
and  faculty,  tax  on  property  and  faculty.  The  Gen- 
eral Court  of  Massachusetts  laid  down  in  1634  the 
following  principle  :  "  In  all  rates  and  public  charges 

1  Spottiswood  Letters,  quoted  by  Ripley,  Financial  History  of 
Virginia. 

2  See   Wood,    History  of  Taxation  in   Vermont,  p.   13.     Also 
Schwab,  History  of  the  New  York  Property  Tax. 

.-    »  Cf.  Seligman,  Essays,  pp.  19  ff. 


CHAP,  iv  DEVELOPMENT  OF  TAXATION  141 

the  towns  shall  have  respect  to  levy  every  man  ac- 
cording to  his  estate,  and  with  consideration  all 
other  his  abilities  whatsoever,  and  not  according  to 
the  number  -of  his  persons."  1  Later,  however,  poll 
taxes  were  used,  and  the  general  property  tax  was 
extended  to  cover  property  in  the  process  of  acqui- 
sition, or  the  earnings  of  labour.  In  all  the  New 
England  colonies  the  resulting  system  was  practi- 
cally as  follows  :  Each  person  was  to  contribute  as 
he  was  able.  Ability  was  measured,  first,  by  prop- 
erty, real  and  personal ;  secondly,  by  the  The  New 
person  himself  ;  thirdly,  in  the  case  of  England  sys- 
wage-earners,  merchants,  and  others,  by  * 
earnings.  With  a  few  notable  exceptions,  as  in  the 
case  of  lawyers,  the  third  measure  of  ability  grad- 
ually fell  into  disuse.  It  has  been  repeatedly 
pointed  out  2  that  the  New  England  people  had  the 
habit  of  saving.  All  earnings  were  soon  turned 
into  property.  So  that  the  demands  of  justice 
were  fully  met  by  the  general  property  tax  and 
the  poll  tax.  In  addition  to  these  direct  taxes, 
there  were  a  number  of  indirect  taxes,  "imposts," 
some  collected  in  the  form  of  licenses,  and  many  as 
excises. 

In  the  Southern  colonies,  of  which  Virginia  will 
serve  as  a  model,  the  first  taxes  were  the  poll  taxes. 
"  Personal  responsibility,"  says  Mr.  Ripley,  "  was 

1  Massachusetts  Records,  quoted  by  Douglas,  Financial  History 
of  Massachusetts,  p.  18. 

2  Walker,  "  The  Bases  of  Taxation,"  Pol.  Sci.  Quar.,  Vol.  IIL 


142         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

thus  the  basis  of  taxation  at  first,  but  as  the  burden 

of  taxation  became  heavier  this  liability  was  partly 

„    transferred  to  real  estate."1     This  trans- 

Virgima  poll 

taxes  and  cus-  fer  of  the  burden  to  real  -estate  began 
with  the  practice  of  making  the  per- 
sonal tax  a  lien  upon  the  property  of  absentees,  or 
of  persons  dying  before  the  payment  of  the  tax. 
The  general  property  tax  in  a  form  like  that  in 
use  in  New  England  did  not  exist  in  Virginia  be- 
fore the  Revolution.  The  grossness  of  the  poll  tax 
was  modified  by  some  reference  to  the  different  kinds 
of  property  owned.  In  consequence  of  the  failure 
to  develop  a  good  system  of  direct  taxes  Virginia  re- 
sorted to  indirect  taxes,  export  duties  on  tobacco  and 
hides,  import  duties  on  liquors  and  slaves,  and  some 
general  tunnage  duties  forming  the  main  features. 

The  third  or  central  system  is  fairly  represented 
by  New  York.  There,  under  the  West  India  Com- 
New  York  ex-  Pan7>  1621-1664,  taxation  first  took  the 
cises-  form  of  moderate  indirect  taxes  on  goods 

imported  and  exported  and  imposts  on  the  consump- 
tion of  beer,  wine,  and  spirits.  It  was  after  the 
passage  of  the  colony  into  the  hands  of  the  English 
that  attempts  were  made  to  develop  the  property 
tax.  The  actual  existence  of  this  tax  begins  with 
the  formation  of  the  Assembly  after  1683. 2 

1  Financial  History  of  Virginia,  p.  21. 

2  See  Schwab,  Die  Entwickelung  der  Vermogensteuer  im  Staate 
New  York,  Jena,  1890.     Also  Schwab,  History  of  the  New  York 
Property  Tax,  Pub.  of  the  Amer,  Econ.  Assn.,  V.,  5. 


I 

CHAP.  IV  DEVELOPMENT  OF  TAXATION  143 

In  all  parts  of  the  United  States  after  the  Revolu- 
tionary War  the  main  reliance  for  local  revenue  was 
the  general  property  tax.  The  commonwealths,  as 
such,  had  little  need  for  revenues  until  after  1840. 
In  the  formation  of  the  Union  indirect  taxes  were 
made  the  prerogative  of  the  federal  government,  so 
that  the  commonwealths  had  to  resort  to  other 
means.  The  character  of  direct  taxation  in  the 
United  States  since  the  formation  of  the  Union  will 
be  treated  in  the  next  chapter.  The  differences  in 
the  forms  of  taxation  in  the  different  parts  are  due 
both  to  political  and  economic  differences. 


144         INTRODUCTION  TO  PUBLIC  FINANCE      PART  11 


CHAPTER  V 

THE     DEVELOPMENT    OF    TAX    SYSTEMS     SINCE    THE 
INDUSTRIAL   REVOLUTION 

SECTION  1.  The  trend  of  the  development  of 
taxation  was  abruptly  changed  by  the  industrial 
Changes  in  revolution  at  the  close  of  the  last  cen- 
taxation  due  tury.  On  the  one  hand,  the  development 

to  the  Indus-         .  _ .  ,    , 

trial  revolu-  °f  constitutionalism,  vesting,  as  it  did, 
tion.  the  control  of  the  purse  in  the  people, 

and  especially  in  the  tax -payers,  had  the  inevitable 
effect  of  changing  the  ideas  underlying  the  tax 
systems.  New  ideas  as  to  the  justification  of  taxa- 
tion developed,  and  with  them  a  tendency  to  seek 
new  measures  of  taxation.  On  the  other  hand,  the 
rapid  increase  in  wealth,  the  growth  of  new  forms 
of  wealth,  such  as  invested  capital,  the  birth  of  new 
kinds  of  property,  as  the  many  kinds  of  credits, 
and  the  rapid  change  in  the  distribution  of  wealth 
among  the  different  classes  in  the  community,  — 
all  of  these  and  other  similar  causes  led  to  the 
constant  extension  of  taxation  to  the  new  forms. 
Old  taxes  which  were  well  suited  to  certain  simpler 
conditions  of  society  become  under  new  conditions 
unjust,  and  give  rise  to  dissatisfaction,  to  many 
attempted  and  some  accomplished  reforms.  These 


I 
CHAP,  v        DEVELOPMENT  OF  TAX  SYSTEMS  145 

reforms  in  turn  prove  no  more  satisfactory  in  the 
long  run,  for  the  conditions  they  were  intended  to 
meet  change  again. 

Just   as   the   attention  of  economists  was  chiefly 
directed  to  the  study  of  productive  agencies  during 
the  first  three-quarters  of  the  century,   Taxation  of 
so  the   general   tendency   of    the   same  the  agents  of 
period  in  finance  may  be  broadly  charac-  prod 
terised  as  an  attempt  to  compel  the  different  agen- 
cies of  production  to  contribute  to  the  support  of 
the    government.       It   is   claimed   that   economists 
have,    during   the    last   two   decades,    turned   their 
attention  more  to  the  consideration  of  questions  of 
distribution,  and  it  is  certainly  true  that  the  most 
recent   tax   reforms   have  been  in  the  direction  of 
securing  a  better  division  of  the  burden  among  the 
sharers  of  the  new  wealth  rather  than   Taxationof 
among   the   producers   thereof.      Subor-  the  shares  in 

j'  ,1  •  j  •  distribution. 

dinate  to  this  tendency  are  various  pro- 
posals   and    attempts   to   alter  the   distribution   of 
wealth  by  the  use  of  the  taxing  power. 

The  demands  upon  the  revenues  increased  vastly 
during  and  immediately  after  the  period  of  war 
which  followed  the  French  Revolution.  Large  debts 
had  been  accumulated;  great  armies  and  navies 
claimed  support  even  in  times  of  peace.  Effect  of  tran- 
New  functions  were  being  thrust  upon  ?^™g°"con_ 
the  governments.  Moreover,  the  new  omy." 
economic  era  demanded  the  payment  of  all  charges 
upon  the  State  in  money  and  necessitated  the  col- 


146         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

lection  of  revenues  in  money.  The  old  feudal 
receipts  and  services  became  more  and  more  inade- 
quate; new  industrial  receipts  were,  in  general,  not 
calculated  to  be  much  larger  than  the  sums  neces- 
sary to  support  the  service  or  institution  which 
furnished  them.  Consequently,  taxation  on  an  ever 
increasing  scale  becomes  the  basis  of  all  State 
finances.  Taxation  is  no  longer  regarded  as  a 
temporary  expedient  to  meet  passing  and  extraor- 
dinary needs.  It  is  admittedly  a  necessary  and 
permanent  policy. 

The  doctrine  of  political  equality  when  generally 
accepted  leads  to  a  demand  for  universality  and 
Effectsofpolit-  equality  of  taxation.  The  difficulties 
ical  equality,  that  arise  are  no  longer  as  to  the  justi- 
fication of  taxation  in  general,  but  as  to  the  justice 
of.  certain  forms  and  measures  of  taxation.  The 
main  question  is,  what  is  equality,  and  what  the 
best  method  of  attaining  it.  The  methods  and 
direction  of  reform  were  necessarily  prescribed 
by  the  constitutions  of  the  various  countries  and 
differ  much  from  land  to  land.  Different  economic 
and  social  conditions  have  also  an  inevitable  effect. 
Among  the  constitutional  features  that  determine 
the  direction  of  taxation  the  following  may  be 
mentioned.  First,  federal  governments  have  gen- 
Federaigov-  erally  been  excluded  from  the  field  of 

ernmentsre-  d[  t  taxation>  The  central  govern- 
sort  to  indirect 

taxes.  ments  of  the  German  Empire,  Switzer- 

land, and  the  United  States   depend  for   revenues 


CHAP,  v        DEVELOPMENT  OF  TAX  SYSTEMS  147 

from  taxation  on  customs  duties  and  internal  ex- 
cises. The  sense  of  loyalty  to  the  central  govern- 
ment is  inferior  to  that  to  the  commonwealth 
governments  so  far  as  willingness  to  contribute 
directly  to  its  support  is  concerned.  The  partial 
concealment  or  at  least  lack  of  prominence  of  the 
indirect  contribution  permits  of  its  collection  with- 
out calling  the  attention  of  the  contributors  forcibly 
to  the  fact  that  they  are  taxed  by  a  new  authority. 
Just  that  advantage  of  partial  concealment  in  this 
tax  which  appealed  so  strongly  to  the  monarchies, 
before  the  birth  of  political  consciousness  on  the 
part  of  the  people,  appeals  to  the  federal  govern- 
ments. At  the  same  time  the  practical  necessity 
of  uniform  rates  over  the  whole  country,  which 
arises  from  the  fact  that  these  taxes  disturb  the 
economic  balance  of  industry  and  commerce,  and 
the  greater  ease  of  administration  with  a  larger 
territory  and  a  single  boundary,  make  it  advisable 
to  put  all  of  them  in  the  hands  of  the  central  organ. 
It  was  the  latter  considerations  in  regard  to  custom 
duties  that  led  to  the  establishment  of  the  Zollverein 
and  eventually  of  the  German  Empire.1 

On  the  other  hand,  the  different  States  of  which 
the  federal  governments  are  composed  have  shown 
themselves  inclined  to  restrict  their  taxation  to  the 


1  See  Bowring's  Report  on  the  Prussian  Commercial  Union, 
Parliamentary  Documents,  1840,  Vol.  XXI.,  pp.  1-17.  Reprinted 
in  Rand,  Economic  History,  p.  170.  Also  Legoyt's  La  France  ft 
VEtranger,  Vol.  I.,  pp.  250-255 ;  ibid. 


148         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

direct  taxes,  leaving  all  but  a  few  of  the  indirect 
ones  to  the  central  governments. 

But  this  separation  of  the  assessment  of  direct 
and  indirect  taxes  between  different  authorities  has 
Difficulties  been  productive  of  great  difficulties. 
which  arise  por  ft  {s  impossible  to  assess  any  tax 
sionofthetax-  justly  and  equally  without  reference  'to 
ing  power.  the  other  burdens  already  imposed  on 
the  contributors.  It  would  seem  that  the  demands 
of  justice  which  dictate  that  the  whole  system  of 
taxation  should  work  toward  a  definite  and  single 
purpose,  will  necessitate  either  the  co-ordination  of 
these  forms  or  the  placing  of  both  of  them  in  the 
hands  of  the  same  authorities.  The  proper  co- 
ordination of  all  taxes  is  hard  to  accomplish  when 
the  taxing  power  is  in  different  hands.  This  is  one 
of  the  hardest  problems  of  American  taxation. 

The  development  of  direct  taxation  will  now  be 
traced  in  detail  by  reference  to  some  of  the  more 
important  countries.  Indirect  taxes  cannot  prop- 
erly be  said  to  have  undergone  any  process  of 
development.  Many  changes  have,  indeed,  been 
made,  dictated  by  different  economic  theories  and 
purposes.  But  it  has  been  simply  a  flux  backward 
and  forward.  Sometimes  ulterior  aims,  as  protec- 
tion, have  been  abandoned  and  strict  fiscal  principles 
allowed  sway.  In  those  cases  we  find  a  simplifica- 
tion and  a  decrease  in  the  number  of  articles  taxed. 
But  no  general  principles  have  been  developed. 

SEC.  2.    Probably  the  most  thorough  attempts  to 


CHAP,  v         DEVELOPMENT  OF  TAX  SYSTEMS  149 

reform  taxation  in  accord  with  clearly  recognised 
principles  of  theoretical  justice  have  been  in  Prussia. 
That  country  has  taken  advantage  from  time  to 
time  of  the  advice  of  men  of  science.  It  has  been 
doubly  happy  (1)  in  having  a  goodly  Prussia  made 
number  of  unpartisan  financial  scientists  'use  of  men  of 
to  draw  upon;  (2)  in  being  able  to  draw  science- 
upon  them  for  advice,  either  by  counting  their 
pupils  among  its  fiscal  officers  or  placing  the 
scientists  themselves  on  its  tax  boards  and  commis- 
sions. It  has  been  able  to  make  changes  with  a 
broad  conservatism  that  looked  toward  the  gradual 
realisation  of  accepted  ideals.  With  characteristic 
visionary  eagerness,  France  has  several  times  started 
out  to  obtain  at  a  single  bound  some  Little  advance 
new  ideal,  but  has  each  time  fallen  back  in  France. 
upon  forms  and  methods  but  little  better  than  those 
in  vogue  before.  In  England,  special  difficulties 
and  objections  have  been  met  with  little  reference 
to  any  general  plan.  The  result  has  Englandre_ 
been  a  steady  approach  to  a  better  state  moves  special 
of  affairs,  with  only  an  occasional  in-  *ai 
tensification  of  existing  evils,  due  to  the  attempt  to 
cure  symptoms  rather  than  to  seek  the  underlying 
causes  of  the  trouble.  In  the  United  States  there 
have  been  spasmodic  and  ill-directed  at-  No  consistent 
tempts  at  the  removal  of  a  few  clearly  reforms  in  the 
recognised  abuses  ;  and  without  any  con- 
sistent attempt  to  change  the  system,  the  result  has 
been  a  decided  modification.  The  general  failure  of 


150         INTRODUCTION  TO  PUBLIC  FINANCE      PART  II 

the  property  tax  to  reach  personal  property  gave 
rise  at  first  to  vigorous  efforts  to  extend  and  sharpen 
the  methods  of  assessment.  These  attempts  fail- 
ing, other  methods  of  reaching  the  mass  of  personal 
property  were  devised,  which  have  resulted  in  a 
partial  change  of  system  wherever  they  have  been 
successful. 

SEC.  3.  The  most  instructive  country  to  study  is 
Prussia.  The  line  between  the  old  and  the  new 
may  be  drawn  at  the  reforms  of  Stein  and  Harden- 
burg  in  the  forms  of  land  tenure.  These  reforms 
Establishment  may  be  regarded  as  having  been  accom- 

tiandin^      Plished  in  1811'      Brie%  stated>  their  re~ 

Prussia.  suit  was  to  abolish  personal  serfdom, 
dissolve  the  feudal  partnership  between  tenants  and 
proprietors,  and  establish  free  trade  in  land.1  Al- 
though these  reforms  had  to  do  mainly  with  land, 
and  although  the  accompanying  edict  of  1810  prom- 
ised speedy  reform  of  the  land  tax  on  the  basis 
of  a  new  survey,  or  cadastre,  nothing  material  was 
accomplished  in  the  reorganisation  of  this  tax  until 
1861.  In  that  year  the  land  tax  was  re- 

The  land  tax.  TO-,  *,  -, 

arranged  for  the  entire  kingdom  on  the 
basis  of  a  new  and  rapidly  executed  survey.  Some 
twenty  different  provincial  land  taxes,  with  up- 
wards of  one  hundred  minor  variations,  which  had 

1  Seeley's  Life  and  Times  of  Stein,  Vol.  I.,  pp.  187-297.  Morier, 
"  The  Agrarian  Legislation  of  Prussia  during  the  Present  Century," 
inProbyn  [Editor],  Systems  of  Land  Tenure  in  Various  Countries, 
pp.  306-316.  See  Selections  in  Rand. 


CHAP,  v        DEVELOPMENT  OF  TAX  SYSTEMS  151 

existed  before  that  time,  were  merged  into  an  ap- 
portioned tax  upon  the  net  product  of  each  piece 
of  land  as  given  in  the  cadastre.  This  tax  recently 
yielded  about  40,000,000  M.  annually. 

The  reforms  which  preceded  this  were  those  of 
the  indirect  consumption  taxes,  out  of  which  finally 
emerged   the   personal   class   tax.      The  Consumption 
edict   of    1810,   which   was   referred   to  taxest^ 

formed  into 

above  as  promising  a  reform  of  the  land  personal  taxes. 
tax,  seriously  attempted  to  remove  inequalities  by 
destroying  many  feudal  exemptions  and  privileges, 
and  removing  local  differences.  A  general  scheme 
of  consumption  taxes  on  necessaries,  of  which  the 
excise  on  meal  is  a  type,  was  planned  for  city  and 
country  alike.  It  was,  however,  immediately  found 
that  the  meal  tax  was  hard  to  collect  in  rural  parts. 
As  early  as  1811,  therefore,  a  poll  tax  of  one-half 
thaler  from  every  person  over  twelve  years  of  age 
was  substituted  for  the  meal  tax  in  all  places  except 
the  larger  towns.  In  1820  this  tax,  still  applying 
to  the  same  places,  developed  into  a  classified  poll 
tax ;  i.e.  all  persons  were  grouped  according  to 
rank,  profession,  and  general  prosperity,  into  a  few 
classes,  which  were  then  taxed  per  capita  at  different 

rates  for  each  class.     Somewhat   modi- 

The  class  tax. 

fied  the  next  year,  so  as  to  make  twelve 
classes,    in   groups   of    three   each,   and   with   rates 
which  ranged  from  one-half  thaler  to  144  thalers, 
and  covering  all  persons  over  fourteen  years  old, 
this  tax  endured  thirty  years.     As  before,  this  tax 


152         INTRODUCTION  TO  PUBLIC  FINANCE      PART  H 

did  not  extend  to  the  large  cities,  where  the  excise 
on  meal  and  meat  was  regarded  as  placing  the  same 
burden  on  the  people.  Such  a  remarkably  clear 
perception  of  the  fact  that  indirect  taxes  are  practi- 
cally the  equivalent  of  direct  taxes  in  the  individual 
burden  they  impose  is  not  often  met  with  in  fiscal 
history. 

In  1851,  this  tax  was  changed  in  order  to  make 
room  for  the  introduction  of  an  income  tax  on  all 
The  income  persons  having  an  income  of  over  1000 
tax-  thalers.  Those  persons  whose  incomes 

were  below  this  amount  were  taxed  in  the  large 
cities  by  the  meal  and  meat  tax  ;  in  the  country  and 
in  small  towns,  by  a  class  tax,  like  the  old  one,  with 
rates  ranging  from  one-half  thaler  to  24  thalers, 
according  to  the  supposed  income.  Persons  living 
in  large  cities  who  paid  the  income  tax  were  allowed 
to  deduct  20  thalers  from  their  income  as  com- 
pensation for  the  meal  and  meat  tax  they  were 
supposed  to  have  paid.  Later  reforms  removed 
these  gate  excises  except  for  local  purposes.  As 
the  income  tax  forms  a  special  topic  in  a  later 
chapter,  we  will  not  at  present  follow  the  details 
of  its  development  and  reform.  It  is  sufficient  to 
say  that  it  was  a  progressive  tax  on  the  income 
of  every  person.1 

When  the  land  tax  was  reformed  in  1861,  the 
building  tax  was  separated  from  it,  having  been 
until  that  time  a  part  of  it;  and  all  old  taxes  of 
1  See  Chapter  IX.  , 


CHAP,  v        DEVELOPMENT  OF  TAX  SYSTEMS  153 

a  similar  sort  were  merged  in  the  new  one.  This 
tax  is  assessed  in  the  cities  according  to  the  rental 
of  the  buildings,  and  in  the  country  ac- 

, .  , ,          .  »     . ,        ,       ,  Building  tax. 

cording  to  the  size  of  the  lands  con- 
nected with  the  houses,  and  other  characteristics. 
One  of  the  reforms  that  was  made  after  the  peace 
of  Tilsit  to  strengthen  the  weakened  economic  re- 
sources of  the  country  was  the  establishment  of 
general  industrial  freedom.  Naturally,  such  a 
change  would  have  been  regarded  as  a  failure  from 
the  standpoint  of  the  statesmen  of  the  times,  if  it 
could  not  be  made  to  yield  a  revenue  to 

,,  ,,  .     ,      ,    .  Industry  tax. 

the  treasury;  so  the  new  industries  were 
burdened  with  a  new  tax.  This  tax,  which  was 
very  weak,  and  which,  wisely,  perhaps,  failed  to 
meet  all  the  new  forms  of  industry  which  came  into 
existence,  was  subjected  to  a  thoroughgoing  reform 
in  1891.  But  it  was  at  that  time  transferred  to  the 
local  governments.  Capital  invested  and  some  of 
the  permanent  features  of  each  business  form  the 
basis  of  this  tax. 

The   Prussian   system,    as   it   existed  before   the 
great  reforms  of  1893,  may  now  be  seen  as  a  whole. 
It  consisted  of  two  parts :    (1)  There  was  a  group 
of  three  complementary  taxes  upon  the  summary  of 
produce  of  property  and  capital,  —  the  the  Prussian 

f  .        system  before 

land  tax,  the  building  tax,  and  the  in-  the  recent  re- 
dustry  tax ;    (2)  there  was  a  system  of  forms- 
personal    taxes    culminating    in    an    income    tax. 
The  former  group,  true  to  the  economic  tenets  of 


154         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

the  first  three-quarters  of  the  century,  taxed  the 
productive  agencies.  The  latter,  although  it  orig- 
inated as  a  consumption  tax,  aimed  at  taxing  the 
shares  in  distribution.  Thus  the  older  consumption 
taxes,  which  were  originally  assessed  without  any 
very  clear  idea  of  what  the  justification  was,  but 
were  used  because  productive  of  large  revenues, 
yielded  to  new  taxes  supposed  to  be  more  fairly 
in  accord  with  the  modern  system  of  distribution. 

We  are  now  in  position  to  see  the  significance  of 
the  great  reforms  of  1893  (all  of  which  went  into 
The  great  re-  effect  in  1895),  made  under  the  leader- 
formsofi893.  ghip  of  Finanzminister  Dr.  Miquel. 
These  reforms  place  Prussia  far  in  advance  of  all 
other  countries  in  the  theoretical  perfection  of  her 
tax  system.1  The  income  tax,  which  has  long  been 
correctly  regarded  as  the  foundation  of  the  Prussian 
tax  system,  was  subjected  to  a  thorough  reform  in 
1891. 2  It  was  strongly  urged  at  that  time  that 
income  from  property  represented  a  far  higher  fac- 
ulty, per  unit,  than  income  from  labour  and  personal 
exertion,  and,  therefore,  that  a  perfect  system  should 
contain  two  kinds  of  progression:  one  that  taxed 
larger  incomes  more  heavily  than  smaller  ones ; 
another  that  taxed  incomes  from  property  more 
heavily  in  proportion  than  incomes  from  labour. 
It  was  felt  that  the  existing  produce  taxes  (JEr- 

1  See  Seligman,  Essays,  pp.  330-339.    References  to  larger  and 
more  detailed  statements  are  given  there. 

2  See  Chap.  IX. 


CHAP.V        DEVELOPMENT  OF  TAX  SYSTEMS  155 

tragsteuerri),     the     land,     building,     and     industry 
taxes,  failed  to  accomplish  this  end.     Hence  one  of 
the  reforms  of  1893  was  the  surrender   The  general 
of  these  taxes  as  royal  taxes,  and  the  property  tax. 
initiation  of  a  general  property  tax  as  supplement- 
ary to  the  income  tax.     This  tax,  which  can  only 
be    properly   understood    when    its    supplementary 
character  is  held  in  mind,  is  arranged  as  follows  : 

The  tax  is  one -half  per  mill  on  the  lower  limit 
of  the  class  within  which  the  property  falls.  The 
classes  go  by  stages  of  2000  M.  from  6000  M.  to 
40,000  M.,  of  4000  M.  up  to  60,000  M.,  of  10,- 
000  M.  up  to  200,000  M.,  and  above  that  of 
20,000  M.  each. 

Thus: 

PROPERTY,,  TAX. 

Up  to  6,000  M.  .  .  .  exempt. 

From    6,000  "  8,000  "  .  .  3  M. 

8,000  «  10,000  «  .  .  .  4   « 

10,000  «  12,000  "  .  .  .  5   « 

20,000  "  22,000  "  .  .  .  10   " 

40,000  "  44,000  «  ...  20   « 

60,000  «  70,000  "  .  .  .  30   «  etc. 

Above  200,000  M.  the  stages  are  20,000  M.  each, 
and  the  tax  increases  10  M.  in  each  stage. 

This  tax  being  supplementary  to  the  income  tax 
accomplishes  the  result  of  imposing  a  differential 
rate  on  funded  income  as  against  unfunded  in- 
come. 

The  abandonment  by  the  State  of  the  three  old 
taxes  on  land,  buildings,  and  industry  rendered  the 


156         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

reform  of  local  taxation  possible.  As  has  already 
been  said,  the  proper  co-ordination  of  all  tax  burdens 
7%  3  reform  of  is  one  of  the  chief  problems  of  modern 
local  taxation,  tax  reform.  With  the  exception  of  the 
beer  taxes,  and  the  meat  and  meal  taxes  still  used 
by  some  of  the  cities,  local  taxation  in  Prussia  is 
mainly  direct.  Most  of  it,  until  1895,  took  the 
form  of  additional  percentages  to  the  rates  of  the 
royal  taxes.  In  some  cities  there  were  important 
special  local  taxes,  like  the  house  rent  tax  in  Berlin. 
Prussia,  also,  grants  subsidies  from  the  royal  treas- 
ury to  the  local  bodies  for  special  purposes.  But 
the  symmetry  of  the  national  system  was  somewhat 
destroyed  by  these  additional  rates.  Such  additions 
» to  the  income  tax  were  especially  intolerable.  Real 
estate  is,  moreover,  a  particularly  good  basis  for 
local  assessment.  It  cannot  evade  the  tax,  and  it  is 
the  recipient  of  particular  benefits  from  good  local 
government.  The  same  is  true  of  businesses  of  a 
local  character,  although  it  is  not  safe  to  let  the  rate 
vary  from  place  to  place.  Hence  these  three  taxes 
were  handed  over  to  the  local  bodies.  At  the  same 
time  the  attempt  was  made  to  regulate  all  other 
sources  of  local  revenues. 

The  Prussian  system  as  it  now  stands  comes 
nearest  to  the  realisation  of  the  taxation  of  faculty 
of  any  in  the  world.  The  chief  difficulties  that  have 
arisen  are  those  of  assessment.  The  progressive  rate 
gives  rise  to  a  special  incentive  to  the  concealment 
of  larger  incomes,  and  not  even  the  general  excel- 


CHAP,  v         DEVELOPMENT  OF  TAX  SYSTEMS  157 

lence  of  Prussia's  administration  has  been  preventive 
of  under-assessment.1 

SEC.  4.  In  France  indirect  taxation  has  probably 
found  a  higher  development  than  anywhere  else. 
Some  of  the  main  taxes  are  on  the  consumption 
of  wine,  spirits,  beer,  sugar,  salt,  tobacco,  etc. ;  there 
are  also  the  octrois  or  gate  duties  collected  by  some 
of  the  cities  as  a  means  of  contributing  High  deveiop- 
their  share  of  some  of  the  direct  taxes  m™* \^indi' 

rect  taxes  in 

to  the  general  treasury.  There  are  also  France. 
the  taxes  on  acts  and  transfers,  which  will  be  treated 
under  fees,  since  they  assume  a  public  service,  and 
the  customs  duties.  Not  peculiar  to  France,  but 
receiving  a  high  development  there,  is  the  mode 
of  collecting  a  tax  on  consumption  by  a  monopoly 
of  the  manufacture  of  tobacco  in  the  hands  of  the 
government.  The  imperative  necessity  under  which 
France  has  laboured  all  through  this  century  of 
continually  increasing  her  revenues,  and  the  danger 
of  making  the  burden  unbearable  if  thrown  upon 
the  existing  direct  taxes,  as  well  as  the  desire  on  the 
part  of  the  legislators  of  concealing  so  far  as  possible 
the  actual  burden,  lest  an  impatient  constituency 
rebel,  accounts  well  for  the  relatively  high  develop- 
ment of  indirect  taxation.  The  preference  for  in- 
direct taxes  as  the  main  reliance  of  the  public  reve- 
nues argues,  however,  a  low  stage  of  political  ethics. 

1  See  the  revelations  of  the  Bochum  investigations,  quoted  by 
Wagner  in  Schanz  Finanzarchiv,  XVIII.  year,  Vol.  II.,  pp.  107, 
108. 


158         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

t 
The   more   highly   developed   the   consciousness   of 

citizenship  and  membership  in  the  State,  the  easier 
it  is  to  make  direct  taxation  effective. 

Direct  taxation  in  France  dates  in  its  present 
form  from  the  Revolution.  All  the  taxes  of  the 
ancient  monarchy  were  abolished  at  that  time  and 
a  fixed  scheme  of  taxes  on  revenue-yielding  prop- 
erty substituted.  This  system  of  direct  taxes  has 
four  chief  members :  (1)  the  tax  on  real 

The  members  ^   ' 

of  the  system    estate  ;   (2)  the  tax  on  persons  and  dwell- 

ofdirecttaxes.    ^ .     ^     the    ^    Qn    do()rs    ftnd    ^ 

dows ;  (4)  the  tax  on  business.  Supplementary  to 
this  system  are  a  number  of  taxes  classed  officially 
as  assimilated  to  the  direct  taxes.  These,  so  far  as 
they  flow  into  the  State  treasury,  are:  (1)  the  tax 
on  mines;  (2)  the  charges  for  the  verification  of 
weights  and  measures ;  (-3)  the  tax  on  goods  in 
mortmain  falling  on  the  property  of  the  communes, 
hospitals,  churches,  seminaries,  charitable  institu- 
tions, etc. ;  (4)  the  charges  for  the  cost  of  inspec- 
tion of  pharmacists,  grocers,  druggists,  and  herbists. 
Of  these  numbers  2  and  4  are  practically  fees,  num- 
bers 1  and  3  are  merely  definite  kinds  of  real  estate 
taxes.1 

The  real  estate  tax,  the  personal  and  dwelling 
tax,  and  the  door  and  window  tax  are  apportioned 
taxes.  The  real  estate  tax,  which  is  a  combined 

1  The  official  classification  of  taxes  in  France  is  very  complex, 
as  the  example  above  given  shows.  In  order  not  to  confuse  the 
student  it  will  not  be  followed  further  in  this  work. 


CHAP,  v         DEVELOPMENT  OF  TAX  SYSTEMS  159 

land  and  building  tax,  is  apportioned  upon  the  basis 
of  a  very  elaborate  survey  and  valuation  completed 
in  1850,  and  carefully  kept  up.  These  Theappor- 
taxes  are  apportioned  in  successive  steps  tioned  taxei*- 
first  to  the  departments,  then  to  the  arrondissements, 
and  then  to  the  communes,  by  the  several  legislative 
bodies,  and  finally  divided  among  the  individuals 
in  each  commune  by  a  "conseil  de  repartition."  The 
tax  on  persons  and  dwellings,  also  apportioned,  is  a 
poll  tax,  with  an  attempt  at  gradation  according  to 
the  ability  supposed  to  be  indicated  by  the  rent  of  the 
building  occupied.  It  consists  of  two  parts:  (1)  the 
amount  of  three  days'  wages  of  labour  at  from  one- 
half  to  one  and  one-half  francs  per  diem;  (2)  the  tax 
on  the  rent  of  the  building  occupied  as  a  private  dwell- 
ing. The  cities  of  Paris,  Lyons,  Marseilles,  and  a  few 
others  raise  their  shares  of  this  tax  by  the  means 
of  duties  on  goods  brought  into  the  city,  i.e.  octroi. 
The  door  and  window  tax  is  an  apportioned  tax 
rated  according  to  the  number  of  windows  and 
doors  in  the  houses.  It  was  intended  to  supplement 
the  personal  and  dwelling  tax,  but  it  is  really  an 
addition  to  the  real  estate  tax.  It  is  paid  by  the 
owner  and  he  is  allowed  to  shift  it  if  he  can  to 
the  tenant. 

The  industry  tax,  contribution  des  patentes,  unlike 
the  other  members  of  the  system,  is  not  apportioned 
but  proportioned.  It  is  intended  to  reach  the  bulk 
of  the  personal  property,  and  in  a  rough  way  covers 
income  from  certain  kinds  of  labour.  Originally  it 


160         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

was  assessed  in  proportion  to  the  value  of  the  loca- 
tion of  the  factory,  store,  or  workshop  occupied  by 
Thedroitde  the  industry.  Now  it  is  assessed  upon 
patent.  some  elaborately  constituted  classes,  in 

rates  which  vary  with  the  size  of  the  community 
in  which  the  business  is  done,  and  the  rental  of  the 
place  of  business.  It  includes  all  kinds  of  commer- 
cial and  industrial  enterprises  and  occupations,  large 
and  small,  and  also  the  liberal  professions,  when  not 
exercised  in  behalf  of  some  already  taxed  business 
enterprise.  The  agriculturalists  are  exempt. 

Direct  taxation  in  France  may  be  summarised  as 
falling  mainly  on  the  agents  of  production  and  the 
sources  of  wealth. 

SEC.  5.  The  English  system  of  taxation  can  be 
very  briefly  treated  here,  because  the  principal  com- 
ponent parts  will  be  discussed  in  detail  in  later 
chapters.  What  is  necessary  here  is  to  give  an 
outline  of  the  system  as  a  whole.  The  greatest 
change  in  the  British  scheme  of  taxation  within 
The  reforms  of  this  century  was  the  elimination  of  the 
1840-1850.  protective  principle  from  the  customs 
duties,  —  and  indirectly  from  the  excises  also,  — 
brought  about  in  the  period  from  1840-1850,  by 
the  abolition  of  the  corn  laws  and  the  agitation 
leading  thereto.  The  consequent  simplification  of 
both  the  import  duties  and  the  excises  rendered  it 
possible  to  manage  them  simply  as  a  source  of 
revenue  with  a  view  to  obtaining  relatively  larger 
sums.  The  customs  duties,  the  entire  tariff  of 


CHAP,  v         DEVELOPMENT  OF  TAX  SYSTEMS  161 

which  now  contains  only  40  rates,  and  the  some- 
what more  numerous  excises  and  stamp  duties,  pay 
one-half  the  total  annual  revenue.  The  property 
and  income  tax,  which  was  restored  in  1842  and 
has  since  been  the  variable  or  elastic  „,, 

The  property 

element  in  the  system,  will  also  receive  and  income 
special  attention  in  another  chapter.  In-  ax' 
asmuch  as  this  famous  property  and  income  tax 
is  a  system,  in  itself,  of  five  taxes  which  are  calcu- 
lated to  fall  upon  the  chief  sources  of  wealth,  it 
complies,  in  a  way,  with  the  requirements  of  uni- 
versality. Its  rate  is  digressive,  so  that  it  attempts 
to  comply  with  the  requirements  of  justice.  It  may 
be  looked  upon  as  the  complete  system  of  direct 
taxation.  Outside  of  the  system  there  are  two 
remnants  of  older  taxes  which  are  anomalies  and 
destroy,  somewhat,  the  logic  of  the  system.  This 
lack  of  any  logical  reason  for  retaining  them  does 
not  necessarily  form  any  good  reason  for  abolishing 
them.  They  give  rise  to  no  serious  complaint,  they 
are  old  and  have  been  in  the  main  capitalised,  so 
that  they  form  no  real  burden  at  present.  They 
are  the  land  tax  of  the  eighteenth  century,  which 
is  now  a  redeemable  rent  charge,  and  the  house 
duty.  This  latter  developed  out  of  the  hearth  tax 
of  1662.  In  1688  it  had  been  replaced  by  a  window 

tax.     In  1778  a  tax  on  the  annual  rental 

i  i    i  ,      ,1          -i  i  /•      11       The  house  tax. 

was  added  to  the  window  tax,  and  finally 

after  1851  this  tax  on  the  rental  value  was  left  to 
stand  alone. 


162         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

There  is  still  another  tax  which  supplements  the 
property  and  income  tax,  and  that  is  the  inheritance 
Theinheri-  tax.  The  most  recent  changes  in  these 
tancetax.  inheritance  taxes,  —  "death  duties,"  - 
which  have  existed  in  England  since  1694,  will 
receive  attention  under  another  heading.  The  im- 
portant thing  to  note  in  this  connection  is  that  these 
taxes  have  introduced  the  principle  of  progression 
very  extensively  into  the  tax  system  of  England. 

The  English  system  as  it  now  stands,  consists  (1) 
of  the  customs  and  excise  duties,  (2)  of  the  so-called 
property  and  income  tax,  a  digressive  tax  upon  five 
kinds  of  income,  (3)  two  older  taxes,  the  land  tax 
and  the  house  tax,  (4)  a  graduated  inheritance  tax. 

The  different  authorities  that  have  had  the  power 
to  levy  local  rates  in  England  are  very  numerous. 
The  whole  system  is  very  complex.  The  different 
rates,  each  going  by  the  name  of  the  authority  that 
levies  it,  or  the  purpose  for  which  it  is  collected,  are 
mostly  upon  the  same  base,  namely,  the  annual  rental 
of  the  various  tenements.  They  are  generally  levied 
upon  occupiers.  In  the  case  of  tenements  of  less 
than  X10  annual  value,  the  difficulty  of  collecting 
from  the  occupier  is  so  great  that  the  plan  of  making 
the  landlord  advance  the  tax  has  been  adopted.  He 
then  shifts  it  to  the  occupier.  The  recent  reforms 
of  county  and  municipal  government  in  England 
have  resulted  in  a  simplification  of  local  rates. 

SEC.  6.  Like  the  English,  the  American  system 
can  be  but  briefly  treated  here,  since  many  of  the 


CHAP,  v        DEVELOPMENT  OF  TAX  SYSTEMS  163 

taxes  will  receive  our  attention  in  subsequent  chap- 
ters. The  principal  federal  taxes  have  been  customs 
duties  and  excises.  The  States,  or  commonwealths, 
have  confined  themselves  rather  closely  to  direct 
taxes,  as  have  also  the  municipalities.  Down  to 
1840,  commonwealth  taxation  was  very  meagre. 
Many  of  the  States  attempted  to  get  along  without 
recourse  to  taxation  at  all,  depending  for  revenues 
upon  the  sale  of  lands,  fees,  and  other  sources. 

The  evolution  of  taxation  in  this  country  during 
this  century  has  resulted  in  little  advance.  Indeed, 
it  has  been  to  make  confusion  thrice  con-  „,,  , 

Ine  absence  of 

founded.  Not  only  has  difficulty  been  sound  princi- 
found  in  adjusting  the  spheres  of  the  pes' 
different  taxing  authorities,  but  no  sound  principle, 
indeed  scarcely  any  principle  at  all,  has  been  fol- 
lowed. Before  the  Revolutionary  War  the  general 
property  tax,  whose  origin  we  have  already  seen, 
answered  the  requirements  of  justice  and  equality 
fairly  well.  As  has  been  frequently  remarked,  the 
American  people  were  a  saving  race.  As  fast  as 
they  created  wealth  they  turned  it  into  property. 
The  forms  of  property  were,  even  when  not  im- 
movable, tangible  and  unconcealable.  Real  estate 
formed  the  mass  of  it.  Movable  property  consisted 
of  furniture,  farm  utensils,  and  cattle.  There  were 
few  stocks  or  bonds,  or  other  forms  of  credit  in 
which  to  invest  wealth.  Among  such  a  people  a 
tax  levied  on  property  that  was  easily  ascertainable 
answered  all  the  requirements. 


164         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

But  as  intangible  personal  property  increased,  as 
opportunities  for  investment  multiplied,  it  became 
The  property  impossible  to  make  the  property  tax 
tax  not  "gen-  "general."  It  became  a  tax  on  real 
estate  except  for  the  few  conscientious 
persons  who  declared  their  personal  property.  The 
commonwealth  legislatures  made  half-hearted  at- 
tempts to  sharpen  the  procedure  of  assessment. 
But  little  or  nothing  was  gained  in  that  direction. 
Prompted  by  a  wave  of  popular  excitement,  or  a 
feeling  of  bitterness  toward  certain  classes  of  cap- 
italists, the  legislatures  have,  from  time  to  time, 
The  corpora-  attempted  to  reach  personality  by  taxing 
Introduce  a  ^ne  corP°rati°ns  in  which  the  untaxed 
new  principle,  funds  were  invested.  The  resulting  cor- 
poration taxes  worked  some  slight  improvement. 
Under  the  existing  conditions  they  cannot  all  be 
shifted.  They  supplement  the  general  property 
tax  very  effectively.  Sometimes,  the  legislatures 
Taxation  of  have  attempted  to  tax  mortgages,  as  if 
mortgages.  they  were  a  part  of  the  property  on 
which  they  rest.  As  mortgages  have  to  be  recorded 
in  order  to  be  legal,  it  is  possible  to  get  at  the  full 
value.  In  some  commonwealths,  then,  the  mort- 
gagee is  taxed  on  his  interest  in  the  property  and 
the  owner  is  exempt  to  that  extent.  In  California, 
where  this  plan  has  been  most  extensively  tried,  the 
result  has  not  been  at  all  what  was  desired.  The 
only  effect  has  been  to  raise  the  rate  of  interest  on 
mortgages  by  the  amount  of  the  tax  plus  from  one- 


CHAP,  v        DEVELOPMENT  OF  TAX  SYSTEMS  165 

fourth  to  one  per  cent.  That  is,  the  mortgagees 
have  succeeded  in  shifting  the  burden  of  the 
tax  to  the  real  owners  with  a  handsome  addition  for 
their  trouble.  Such  a  shifting  is  always  possible 
when  any  one  form  of  capital  is  taxed  leaving  other 
forms  untaxed,  either  because  they  are  exempt  or 
because  they  escape  the  tax.  So  the  American  sys- 
tem remains  what  it  has  been  since  1840,  —  a  re- 
gressive tax  on  real  estate,  supplemented  in  part 
by  corporation  taxes  in  some  commonwealths,  and 
by  a  few  inheritance  taxes.  It  is  a  system  con- 
demned by  every  scientific  writer  and  impartial 
statesman,  but  retained  as  the  only  source  of  rev- 
enue. 

The  difficulties  which  have  prevented  persistent 
attempts  at  reform  remain,  and  it  is  hard  to  see  how 
they  can  be  overcome.  No  one  com-  fhe  difficulties 
mon wealth  can  afford  to  pursue  personal  in  the  way  of 
property  with  so  much  vigour  as  to  act-  reS°rm' 
ually  impose  a  tax  on  all  of  it.  Only  concerted 
action  could  accomplish  this.  Capital  is  sufficiently 
mobile  to  move  easily  from  commonwealth  to  com- 
monwealth, and  if  compelled  to  bear  its  fair  share  of 
the  burden  in  one  and  not  in  another,  it  will  surely 
migrate.  Legislators  are  extremely  desirable  of 
attracting  capital  and  very  wary  of  repelling  it. 
The  owners  of  capital  cannot  be  taxed  personally. 
They  change  their  residence  from  city  to  suburb 
and  even  to  unfrequented  rural  parts  on  the  slight- 
est increase  of  local  taxation  and  move  from  com- 


166         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

mon wealth  to  commonwealth  with  equal  facility. 
Residence  too  is  a  matter  of  intention,  and  it  is  easy 
if  personal  taxes  are  proposed  to  plead  residence  in 
another  commonwealth.  Concerted  action  being 
practically  impossible,  the  tax-dodger  is  safe. 

But  while  the  present  system  is  very  bad,  it  has 
been  tolerated  in  the  past,  and  arouses  less  discon- 

Reasonforthe  ^en^  a^  Presen^  than  might  be  expected, 
toleration  of  because  it  falls  mainly  on  the  receivers 

the  system.         Qf   economic  rent>       The  yalue  Qf  land  in 

many  parts  of  the  United  States  has  increased  very 
rapidly  and  is  still  increasing  steadily.  So  that  in 
those  parts,  while  the  taxed  owner  feels  the  burden 
severely,  he  consoles  himself  with  the  thought  that 
he  is  largely  or  wholly  reimbursed  by  the  increased 
price  which  he  hopes  to  get  for  his  land.  The  gen- 
eral practice,  too,  of  assessing  real  estate  at  a  fraction 
of  its  value,  even  though  so  universal  as  to  work  no 
actual  lessening  of  the  burden  in  any  individual 
case,  tends  to  stifle  murmurs  of  discontent.  For 
the  owner  secretly  congratulates  himself  on  not 
having  to  pay  on  all  of  it,  —  an  illogical  basis  for 
self  congratulation,  to  be  sure,  but  still  not  infre- 
quently effective.  The  same  person,  too,  is  not 
infrequently  the  owner  of  taxable  personal  property 
which  he  conceals,  and  he  is  less  uneasy  about  the 
tax  on  real  estate  so  long  as  he  is  able  to  save  the 
other. 

Another  reason  for  the   absence  of  a   concerted 
movement  of  real  estate  owners  to  lessen  the  burden 


CHAP,  v         DEVELOPMENT  OF  TAX  SYSTEMS  167 

arises  from  the  fact  that  the  real  estate  tax  is  a 
real  burden  on  the  property,  and  shifts  itself  by 
the  process  of  capitalisation.  For  the  The  tax  on 
new  purchaser  gets  his  property  at  a  %££££• 
lower  price  than  he  would  have  to  pay  if  charge. 
the  tax  had  not  been  imposed.  The  frequency  and 
ease  with  which  real  estate  changes  hands  gives  con- 
stant occasion  for  this  capitalisation  of  the  tax. 
Every  real  tax,  when  not  a  part  of  a  well-organised 
system  which  taxes  every  kind  of  property  or  all 
receivers  of  wealth,  can  be  shifted  in  this  way.  It 
becomes  a  rent  charge  on  the  property  to  which  it  is 
thus  attached.  A  dim  perception  of  this,  and  a  pos- 
sible realisation  of  the  fact  that  a  reform  of  the  tax 
system  might  transform  this  tax  into  an  actual 
burden  again,  may  lie  at  the  bottom  of  the  indiffer- 
ence with  which  the  average  land  owner  views  pro- 
posed reforms. 

All  of  this  selfish  indifference  is,  of  course,  mis- 
taken. It  defeats  its  own  ends.  The  burden  of 
taxation  is  only  light  when  properly  adjusted  to  all 
the  shoulders.  The  serious  effects  of  an  unjust, 
unequal,  and  ill-arranged  system  of  taxes  upon  the 
economic  forces  of  the  country  has  been  treated  else- 
where. The  property  tax  forms  the  subject  of  a 
special  chapter. 

We  have  spoken  merely  by  courtesy  of  an  Ameri- 
can system.  As  a  matter  of  fact  there  is  none  that 
is  worthy  of  the  name.  Federal  authorities  tax 
with  no  reference  to  commonwealths  and  munici- 


168         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

palities ;  commonwealths  and  municipalities,  with- 
out reference  to  federal  action.  Municipal  taxes 
Entire  ab  are'  h°wever'  generally  adjusted  to  the 
senceofsys-  existing  commonwealth  taxes,  but  only 
in  such  a  way  as  not  to  make  the  result- 
ing burden  appear  too  large.  Their  efforts  in  this 
direction  have  only  served  to  intensify  the  existing 
inequalities. 


CHAP,  vi  V  &XCISES?  169 


CHAPTER  VI 

EXCISES 

SECTION  1.  Generally  speaking,  indirect  taxes  are 
older  than  direct  taxes.  They  are  suitable  to  a 
more  primitive  organisation  of  society.  Hence  it 
will  not  be  amiss  to  treat  them  before  we  analyse 
the  direct  taxes.  By  far  the  larger  part  of  the 
indirect  taxes  are  on  consumption  (Auf-  Gom  arison 
wandsteuern).  Most  of  the  taxes  on  of  excises  and 
consumption  fall  under  one  or  the  other  customs- 
of  two  heads :  they  are  excises  or  customs  duties. 
In  the  United  States  the  excises  are  called  inter- 
nal revenue  taxes.  Excises  may  be  defined  as  all  •/ 
those  taxes  levied  within  a  country  on  commodities 
destined  for  consumption.  Customs  duties  fall  on 
commodities  as  they  enter  the  country.  In  their 
effect  on  the  economic  condition  of  the  country 
and  on  the  tax-bearer  they  are  practically  the  same. 
In  both  cases  the  persons  who  first  advance  the 
taxes  are  generally  supposed  to  reimburse  them- 
selves from  the  persons  to  whom  the  wares  are 
sold.  In  both  cases  it  may  be  true  that  only  a 
part  of  the  funds  taken  from  the  tax-bearer  flows 
into  the  treasury.  For  both  of  them  enable  pro- 
ducers who  escape,  or  whom  it  is  not  intended  to 


170         INTRODUCTION  TO  PUBLIC  FINANCE      PART  11 

tax  (as  the  home  producer  in  the  case  of  a  tax 
on  imported  commodities),  to  collect  on  each  piece 
of  goods  sold  a  tax  in  the  form  of  a  price  higher 
than  he  could  otherwise  obtain,  the  amount  of  which 
goes  into  his  own  pocket.  Sometimes  this  subsi- 
dising of  certain  producers  is  intentional,  sometimes 
only  accidental.  In  any  case  the  ultimate  effects 
which  will  result  from  such  an  interference  with 
the  ordinary  currents  of  trade  cannot  be  fully 
traced.  It  is  very  seldom  that  excises  have  been 
intentionally  used  to  change  the  movement  of 
economic  life.  But  customs  duties  have  regularly 
Excises  have  been  used  for  that  purpose.  Excises 
sometimes  have,  to  be  sure,  been  used  to  influence 

been  used  for  . 

moral  re-  social  life,  to  lessen  the  consumption  of 
forms.  certain  commodities  the  use  of  which  is 

regarded  as  injurious  to  the  individual  or  dangerous 
to  society.  But  the  object,  in  that  case,  is  social, 
not  economic. 

There  used  to  be  a  large  number  of  the  so-called 
direct  consumption  taxes.  A  few  of  these  still 
Direct  con-  survive.  They  are  direct  in  the  first 
sumption  sense  of  that  term,  but  not  in  the  second. 
These  direct  taxes  on  consumption  are 
either  remnants  of  the  older  taxes  on  movables, 
or  arose  from  the  attempt  to  frown  on  the  use  of 
luxuries.  They  differ  from  excises  in  that  they 
are  levied  on  the  consumer  and  not  on  the  person 
or  persons  who  supply  him  with  the  commodities. 
They  are  to-day  few  in  number  and  of  little  fiscal 


CHAP,  vi  EXCISES  171 

I 

importance.  The  chief  instances  in  modern  times 
and  the  most  universal  are  the  dog  taxes.  There 
are  in  England  similar  taxes  on  guns,  carriages, 
armorial  bearings,  and  men  servants.  In  the  United 
States  watches  have  been  made  contributory  in  this 
way.  Plate,  houses,  clocks,  hair  powder,  and  a 
great  many  other  articles  have  been  taxed.  It  is 
regarded  as  just  to  make  articles  of  luxury  the 
subjects  of  taxation  because  their  use  is  supposed 
to  be  evidence  of  ability  to  pay.  The  tendency 
now  is  to  leave  the  administration  of  direct  con- 
sumption taxes  to  the  local  bodies.  They  are  some- 
times combined  with  police  regulative  laws  and  are 
assessed  as  a  means  of  enforcing  those  ordinances. 
This  is  the  case  with  the  dog  tax  in  America. 

SEC.  2.  It  is  the  excise  tax  in  all  its  forms  that 
has  displaced  the  direct  consumption  taxes.  The 
distinguishing  feature  of  this  tax  is  that  some 
resident  seller  of  an  article,  whether  produced  in 
the  country  or  abroad,  or  the  manufacturer  of 
such  an  article,  advances  the  tax  either  some  excises 
during  the  process  of  its  production  or  have  the  same 

, .     '     .     £          .,  1,1  purpose  as 

at  some  time  before  it  reaches  the  con-  sumptuary 
sumer.     The  main  purpose  of  the  excise  laws- 
is  to  obtain  revenue,  but  the  ideas  underlying   the 
sumptuary  laws,  and  the   desire  to  use  taxation  as 
a  means  of   social  and  moral  reform  have  dictated 
some  of  these  taxes  or  at  least  the  selection  of  the 
commodities  to  be  taxed.     The  fact   that   the  con- 
sumption of  certain  articles  like  spirituous  liquors, 


172         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

tobacco,  and  playing  cards  is  condemned  in  itself, 
and  that  such,  articles  are  regarded  as  unneces- 
sary luxuries  has  led  governments  to  disregard,  or, 
indeed,  to  favour,  the  repressive  tendency  of  the 
tax  upon  the  use  of  them.  It  is  felt  that  in  case 
the  tax  should  lessen  the  consumption,  the  gain  to 
the  community  in  moral  and  social  well-being  would 
more  than  offset  the  loss  to  the  treasury  in  revenue. 
Moreover  the  consumption  of  such  articles  is  not, 
it  has  been  found,  liable  to  serious  diminution  on 
account  of  the  tax,  unless,  as  in  the  case  of  the 
French  tax  on  tobacco,  it  is  very  high. 

In  the  seventeenth  century  there  was  a  marked 
tendency  to  multiply  excise  taxes.  So  strong  did  this 
tendency  become  that  not  a  few  able  writers  aclvo- 
An  exclusive  cated  a  general  excise  as  the  most  just 
system  of  ex-  form  of  tax.1  Many  of  the  recent  sug- 

cise  taxes  •  »          r  * 

would  be  un-  gestions  for  the  reform  of  taxation  in 
Just-  France  are  in  the  same  direction.  This 

tendency  can  be  easily  explained  by  rapid  multi- 
plication of  taxable  commodities.  It  was  urged 
that  the  ease  with  which  such  taxes  were  shifted 
ensured  in  the  end  perfect  justice.  It  was  also 
often  urged  that  consumption  is  more  or  less  volun- 
tary, and  any  one  who  finds  the  tax  too  heavy  can 
avoid  it  or  lessen  it  by  curtailing  his  consumption 
of  the  taxed  article.  Thus  if  the  taxed  articles 
are  not  important  necessities  the  contributor  has 
a  certain  control  over  his  share  and  can  suit  it  to 
1  Cf.  Cohn,  p.  336  ;  Seligman,  Shifting  and  Incidence,  pp.  12  ff, 


CHAP,  vi  EXCISES  173 

his  means.  If  the  tax  is  on  a  luxury,  he  has  abso- 
lute control  over  his  contribution.  But  modern 
investigations  into  the  character  of  distribution  and 
consumption  would  seem  to  indicate  that  these 
views  are  erroneous.  There  is  no  doubt  that  con- 
sumption is  a  very  poor  criterion  of  tax-paying 
ability.  What  a  man  spends  is  no  indication  of 
his  tax  faculty.  There  are  also  some  important 
administrative  difficulties.  The  yield  of  these  taxes 
is  beyond  the  control  of  the  fiscal  officers.  An  exclusive 
If  more  revenues  are  needed,  it  is  not  5^emo/e*- 

cises  mexpedi- 

always  possible  to  obtain  them  by  rais-  ent. 
ing   the    rates,    since   a  rise   in   the    rate   may,   in 
fact,  lessen  the  revenues  by  lessening  the  demand 
for   the    articles.      They   are    not   variable   at   the 
pleasure  of  the  treasury.     It  follows  therefore,  that 
a  system   of   excises  would  be  extremely  inelastic. 
But  as  parts  of   a  system,  the   elasticity  of  which 
is  provided  for  by  other  elements,  they  have  proved 
very  valuable   on   account   of  the   relative   ease  of 
administration,    and    the    large    returns   Usedincon 
which  they  can  be  made  to  yield.     In  nectionwith 
England,  Russia,  and  France  the  returns  other  taxes' 
of  the  excises  and  customs  duties  are  about  one-half 
of  the  national  revenues.     In  Germany  the  consti- 
tution  confers   upon   the    Imperial    legislature   the 
power  to  regulate   the   customs   and  excises  upon 
domestic    productions    of    salt,   tobacco,   spirituous 
liquors,    beer,   sugar,    and   syrup.1      The    common- 
i  Burgess,  Political  Science,  II.,  p.  174. 


I 


174         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

wealths  of  the  Empire  do  not  levy  excises  on  the 
articles  above  mentioned  except  Bavaria,  Wurtem- 
berg,  and  Baden.  The  Empire  cannot  tax  any  other 
articles.  In  the  United  States  the  federal  govern- 
ment derives  nearly  half  its  revenues  from  excises 
and  an  almost  equal  amount  from  customs. 

The  following  principles  have  been  developed 
as  governing  the  returns  obtainable  from  excises: 
Excises  on  CO  Articles  which  are  regarded  as  neces- 
necessaries.  saries  and  which  naturally  have  or  can 
have  a  wide  consumption,  are  very  suitable  under 
this  tax  for  obtaining  large  revenues.  In  this  case 
the  operation  of  the  tax  is  like  that  of  a  poll  tax. 
The  French  gabelle  is  an  example.  The  effect  of 
these  taxes,  if  high,  is  possibly  to  curtail  consump- 
tion and  possibly  to  cause  a  substitution  of  other 
similar  articles  not  taxed.  Possibly,  too,  they  may 
curtail  the  consumption  of  other  articles  by  lessen- 
ing the  money  available  for  their  purchase.  But 
even  with  a  low  rate,  these  taxes  are  extremely 
productive,  on  account  of  the  large  number  of  con- 
tributors. The  objection  to  burdening  necessaries 
and  rendering  the  existence  of  the  poor  harder, 
leads,  however,  sooner  or  later,  to  their  abolition. 
These,  like  the  poll  taxes,  recognise  no  differences  in 
Excises  on  ability.  They  are,  however,  good  sources 
luxuries  and  of  revenue  in  cases  of  extreme  need. 
comfort*.  ^2)  Luxuries  and  comforts  may  be  taxed 
heavily.  The  general  principle  is  to  select  those 
luxuries  of  the  widest  consumption  as  the  objects 


CHAP,  vi  EXCISES  175 

of  the  heaviest  taxes.  Thus  alcoholic  liquors  and 
tobacco  are  universally  taxed  in  this  way.  In  the 
United  States  they  form  almost  the  sole  objects.  In 
times  of  special  need  it  is  customary  to  press  the 
semi-luxuries  or  comforts  into  service.  Here  again, 
the  choice  is  made  of  articles  of  widest  consump- 
tion ;  such  as  coffee,  sugar,  silks,  chocolate,  etc.  In 
most  modern  excise  systems,  the  heaviest  burden 
falls  upon  luxuries.  In  England,  where  the  receipts 
from  excises  are  30  per  cent  of  the  total  revenues, 
the  chief  burden  falls  upon  spirits  (<£15,189,000)  and 
beer  (X 9,536,000).  In  France,  aside  from  the  octroi^ 
the  chief  excises  are  on  beer,  wine,  spirits,  and  to- 
bacco, then  on  sugar,  salt,  and  playing  cards.  In 
Germany,  apart  from  the  city  gate  taxes,  they  fall 
upon  alcoholic  drinks,  tobacco,  and  sugar.  There 
are  special  difficulties  which  Germany  encounters  in 
the  administration  of  these  taxes,  due  to  deep-seated 
historical  prejudices  on  the  part  of  the  commonwealths 
of  the  Empire.  Moreover,  the  yield  is  not  as  large 
as  it  might  be  because  of  the  bounties  on  sugar  ex- 
ported. Modern  excises  are,  then,  mainly  taxes  on  al- 
coholic drinks  and  tobacco  with  the  addition  of  a  few 
other  duties  upon  playing  cards,  etc.,  and  in  cases  of 
great  need,  upon  a  few  articles  of  large  consumption. 
SEC.  3.  By  far  the  most  interesting  features  of 
the  excises  are  the  methods  of  assess-  Methods  of 
ment.  These  are  practically  of  three  assessment. 
kinds,  which  may  be  variously  combined :  (1)  A  tax 
on  the  producer  or  seller  such  that  the  failure  to 


176         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

pay  it  deprives  the  person  of  the  right  to  sell,  and 
renders  him  liable  to  penalty.  That  is,  a  license  is 
sold.  (2)  An  impost  on  each  unit  of  the  article. 
This  demands  the  registration  of  the  dealers  therein ; 
and  sometimes  they  are  required  to  give  bonds  as 
surety  for  the  payment  of  the  tax.  Wherever  it  is 
possible,  this  impost  is  collected  by  means  of  the 
sale  of  stamps  purchased  of  the  government  to  be 
affixed  to  each  package,  hogshead,  etc.,  or  by  means 
of  brands,  or  other  marks  affixed  by  officials  who 
thus  receipt  for  the  payment.  (3)  By  the  reten- 
tion of  the  monopoly  of  manufacture  and  sale  by 
the  government. 

England  and  America  use  a  combination  of  (1) 
and  (2).  Thus  in  England  every  barrel  of  beer  is 
taxed  6s.  9d.  and  every  dealer  and  brewer  pays  a 
license  besides.1 

£  s.  d. 

1  Beer,  per  barrel  of  specific  gravity  of  1055  degrees 0  6  9 

Beer  dealers'  and  brewers'  annual  licenses : 

Beer  dealers,  wholesale,  not  brewers,  United  Kingdom  .36  1 
Beer  dealers  to  sell  any  quantity,  additional  (not  to  be 

consumed  on  the  premises,  England  and  Ireland) 1  5  0 

Brewers  brewing  beer  for  sale,  U.  K 1  0  0 

Other  brewers,  U.  K.,  annual  value  of  house  from  £8 

to£10 0  4  0 

Annual  value  from  £10  to  £15 0  9  0 

Retailers  of  beer,  cider,  and  perry : 

For  consumption  on  the  premises,  U.  K 3  10  0 

Not  to  be  consumed  on  the  premises,  England 1  5  0 

Retailers  of  table  beer,  U.  K 0  5  0 

Retailers  of  beer  and  wine,  U.  K. : 

For  consumption  on  the  premises 4  0  0 

Not  to  be  consumed  on  the  premises 3  0  0 


CHAP,  vi  EXCISES  ITT 

In  the  United  States,  all  internal  revenue  taxes 
are  payable  by  stamps.  These  stamps  are  pasted 
upon  the  packages  containing  the  taxed  commodities 
in  such  a  way  as  to  be  necessarily  broken  when  the 
package  is  opened.  Or  else  they  are  pasted  up  or 
exposed  in  the  places  of  business.  The  table  below 
shows  the  whole  system. 

Schedule  of  articles  and  occupations  subject  to  tax  under  the 
internal  revenue  laws  of  the  United  States  in  force  August  28, 1894 
(with  the  exception  of  the  income  tax  then  in  force  but  since  found 
unconstitutional).  From  the  compilation  of  1894 : 

SPECIAL  TAXES. 

Eate  of  tax 

Rectifiers  of  less  than  500  bbls.  a  year ; $100.00 

Rectifiers  of  500  bbls.  a  year,  or  more 200.00 

Retail  liquor  dealers 25.00 

Wholesale  liquor  dealers 100.00 

Retail  dealers  in  malt  liquors 20.00 

Wholesale  dealers  in  malt  liquors 50.00 

Manufacturers  of  stills 50.00 

And  for  stills  or  worms,  manufactured,  each 20.00 

Brewers,  annual  manufacture  less  than  500  bbls 50.00 

Brewers,  annual  manufacture  500  bbls.,  or  more 100.00 

Spirits  are  taxed  in  a  similar  way  and  so  are  the  dealers  therein. 
In  the  case  of  tobacco  the  import  duty  forms  the  tax  on  the  com- 
modity, and  the  manufacturer  pays  a  license  graded  according  to 
the  size  of  his  business. 

Tobacco  manufacturers : 

£  «.  d. 

Under  20,000  Ibs 550 

20,000  to    40,000    " 10  10  0 

40,000  "    60,000    " 15  15  0 

60,000  "    80,000   " 21  0  0 

80,000  "  100,000   " 26  5  0 

100,000 31  10  0 

N 


178         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

Rate  of  tax 

Manufacturers  of  oleomargarine $600.00 

Retail  dealers  in  oleomargarine 48.00 

Wholesale  dealers  in  oleomargarine 480.00 

DISTILLED  SPIRITS,  ETC. 

Distilled  spirits  per  gallon $  1.10 

Wines,  liquors,  or  compounds  known  or  denominated  as 
wines,  and  made  in  imitation  of  sparkling  wine  or  cham- 
pagne, but  not  made  from  grapes  grown  in  the  United 
States,  and  liquors,  not  made  from  grapes,  currants,  rhu- 
barb, or  berries  grown  in  the  United  States,  but  produced 
by  being  rectified  or  mixed  with  distilled  spirits,  or  by  the 
infusion  of  any  matter  in  spirits  to  be  sold  as  wine,  or  as 
a  substitute  for  wine,  in  bottles  containing  not  more  than 
one  pint,  per  bottle  or  package 10 

Same,  in  bottles  containing  more  than  one  pint,  and  not  more 
than  one  quart,  per  bottle  or  package 20 

And  at  the  same  rate  for  any  larger  quantity  of  such  mer- 
chandise, however  put  up,  or  whatever  may  be  the  package. 

Stamps  for  distilled  spirits  intended  for  export,  for  expense..       .10 

TOBACCO  AND  SNUFF. 

Tobacco,  chewing  and  smoking,  fine  cut,  cavendish,  plug, or 

twist,  cut  or  granulated,  of  every  description,  per  pound.  .$    .06 
Snuff  of  all  descriptions,  per  pound 06 

ClGABS   AND   ClGABETTES. 

Cigars  and  cheroots  of  all  descriptions,  domestic  or  imported, 
per  thousand $  3.00 

Cigarettes,  domestic  or  imported,  weighing  not  over  3  Ibs. 

per  thousand,  per  thousand 50 

Cigarettes,  domestic  or  imported,  weighing  over  3  IDS.  per 
thousand,  per  thousand 3.00 

FERMENTED  LIQUORS. 

Fermented  liquors,  per  bbl.,  containing  not  more  than  31 

gal $1.00 

Per  hogshead,  63  gal 2.00 


CHAP,  vi  EXCISES  179 

OLEOMARGARINE.  ^  of  ^ 

Domestic,  per  pound $    .02 

Imported,  per  pound 15 

OPIUM. 
Prepared  smoking  opium,  per  pound. $10.00 

PLATING  CARDS. 
Playing  cards,  per  pack,  containing  not  more  than  52  cards.. $    .02 

SEC.  4.  We  may  now  look  at  a  few  characteristic 
excises.  The  taxation  of  salt  by  means  of  an  ex- 
cise, collected  in  the  form  of  a  tax  on 

The  salt  tax. 

producers,  a  tax  on  sellers,  the  sale  of  a 
monopoly  to  a  private  company,  or  state  manufact- 
ure, is  one  of  the  oldest.  On  account  of  the  nature 
of  the  commodity,  a  necessity  for  which  there  is  no 
substitute,  and  of  which  poor  and  rich  consume  about 
the  same  amount,  this  tax  acts  practically  as  a  poll  tax. 
With  the  modern  tendency  to  abolish  or  at  least  to 
lower  poll  taxes,  as  unequal  and  unjust,  the  salt  tax 
has  been  largely  abolished,  or  its  rates  have  been  so 
lowered  as  to  practically  nullify  the  returns.  France 
to-day  gets  only  1,250,000  francs  from  the  salt  ex- 
cises, to  which  should  be  added  the  customs  duty, 
making  a  total  of  over  3,000,000  francs.  The  Eng- 
lish salt  tax  yielded  at  the  time  of  its  abolition  only 
X 380,000.  The  United  States  war  excise  upon  salt 
yielded  only  1300,000. 

The  best,  but  not  by  any  means  the  sole,  example 
of  the  tobacco  monopoly  is  in  France.  This  inter- 
esting tax  scheme  began  in  1674  under  Colbert.  It 


180         INTRODUCTION  TO  PUBLIC  FINANCE      PART  II 

continued  with  slight  interruptions  for  over  a  cen- 
tury as  one  of  the  most  productive  parts  of  the  rev- 
French  tobac-  enue  system.  It  was  leased  to  a  ferme 
co  monopoly,  ggnerale,  who  paid  the  government  at  the 
time  of  Necker  32,000,000  francs  annually.  At 
the  time  of  the  Revolution  the  monopoly  was  abol- 
ished, and  an  attempt  was  made  to  introduce  a  series 
of  taxes  on  tobacco.  But  the  monopoly  was  restored 
in  1810  by  Napoleon  I.,  and  has  continued  ever  since. 
Under  the  present  law  the  culture  of  the  plant  is 
forbidden  outside  of  certain  localities.  Each  year 
the  estimated  amount  required  by  the  depart- 
ment is  apportioned  among  the  different  applicants 
within  the  district  where  it  is  permitted  to  raise 
tobacco.  Several  thorough  official  inspections  of  the 
fields  and  crops  are  made,  and  even  the  number  of 
plants  and  leaves  is  counted  to  ensure  obedience 
with  the  regulation  which  demands  the  delivery  of 
the  whole  crop  to  the  government.  Tobacco  raised 
for  export  is  similarly  watched  to  see  that  none  of  it 
escapes  into  the  channels  of  the  French  trade.  The 
price  for  each  quality  is  determined  by  a  commission 
of  officials  and  experts.  A  part,  about  one -half,  of 
the  supply  is  imported.  The  manufacture  is  carried 
on  in  public  factories,  which  employ  about  20,000 
workmen.  The  sale  is  in  the  hands  of  some  40,000 
petty  officials,  who  receive  a  percentage  of  their 
sales  and  whose  appointment  is  a  part  of  the  party 
spoils  system.  The  revenues  obtained  in  this  way 
are  enormous  : 


CHAP,  vi  EXCISES  181 

1815  .  .  .  40,000,000  francs. 

1869  .  .  .  197,000,000  « 

1872  .  .  .  218,700,000  « 

1876  .  .  .  262,300,000  « 

1880  .  .  .  284,000,000  " 

1885  ,  .  300,000,000  « 

1890  .  .  .  315,000,000  « 

The  prices  charged  for  tobacco  are  high  compared 
with  the  prices  prevalent  in  other  countries,  so  high 
that  the  consumption  is  apparently  checked  thereby, 
it  being  per  capita  less  than  one-half  that  of  Ger- 
many. Austria  and  Italy  have  very  similar  State 
tobacco  monopolies. 

SEC.  5.  On  account  of  the  large  returns  obtain- 
able from  an  excise  on  luxuries,  and  in  view  of  the 
fact  that  any  repressive  effect  of  such  The 
excises  is  not  felt  to  be  harmful,  but  is  field  for  ex- 
often  desired,  it  is  probable  that  these  c 
taxes  will  be  long  retained.  They  are  applicable  to 
any  luxury  the  consumption  of  which  is  large  and 
of  which  the  production  is  sufficiently  simple  or  con- 
centrated to  allow  of  supervision.  But  in  general, 
excises  as  taxes  on  expenditure  or  consumption  are 
unfair.  What  a  man  spends  is  no  indication  of  his 
ability  to  pay  taxes,  and  what  a  man  spends  on  a  cer- 
tain limited  list  of  commodities  is  less  so.  When 
these  taxes  are  made  a  subordinate  part  of  a  system 
and  due  allowance  is  made  in  the  other  taxes  for  the 
existing  burdens,  there  is  less  objection  to  them. 


182        INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 


CHAPTER  VII 

CUSTOMS   DUTIES 

SECTION  1.  Customs  duties  are  taxes  levied  upon 
commodities  when  they  cross  the  national  boundary 
Customs  line,  or  are  admitted  within  a  customs 
duties  defined,  territory,  consisting  of  a  combination 
of  countries  or  of  definitely  limited  parts  of  coun- 
tries. Unless  a  city  or  town  forms  an  independent 
sovereignty,  taxes  levied  on  goods  entering  a  city 
are  not  called  customs  duties,  but  octroi  or  imposts, 
and  partake  of  the  nature  of  excises.  Duties  upon 
goods  passing  from  province  to  province  in  the  same 
country  are  likewise  not  customs  duties.  Neither 
are  tolls  or  transit  duties  charged  upon  goods  pass- 
ing through  the  country.  Such  charges  are  fees 
for  the  ostensible  or  real  service  of  the  government 
in  keeping  up  roads  and  bridges,  maintaining  peace, 
and  allowing  transit.1  Customs  duties  are  indirect 
consumption  taxes  of  practically  the  same  character 
as  excises.  Their  treatment  in  a  separate  chapter  is 
not  on  account  of  any  actual  difference  in  nature  but 
because  of  their  historical  and  fiscal  importance. 

1  Cf .  Bastable,  p.  513,  for  contrary  view.  Bastable  does  not 
recognise  fees  as  a  separate  class.  Hence  his  identification  of 
transit  duties  with  customs  duties. 


CHAP,  vii  CUSTOMS  DUTIES  183 

SEC.  2.  The  oldest  forms  of  customs  duties  were 
on  exports  and  imports  alike.  They  arose  by  anal- 
ogy from  the  transit  tolls  which  were  Old  customs 
customary  in  the  middle  ages.  Once  j^m^^* 
in  use  their  fiscal  importance  was  recog-  and  exports. 
nised,  and  it  was  easy  from  the  standpoint  of  feudal 
politics  to  justify  their  continuance.  Feudalism  re- 
garded every  act  of  the  vassal  as  the  concern  of  the 
lord.  If  any  vassal,  or  later  any  subject,  found  a 
new  means  of  gain,  feudalism  imposed  on  him  the 
duty  of  contributing  a  part  thereof  to  the  lord  or 
the  king.  If  a  subject  sold  a  commodity  to  a 
foreigner  it  seemed  to  the  men  of  the  middle  ages 
that  the  king's  interests  were  affected,  and  it  seemed 
right  that  his  permission  should  be  paid  for.  The 
export  duty  is  often  a  sort  of  compromise  accepted 
for  the  removal  of  the  prohibition  of  exportation. 
With  the  decay  of  the  older,  cruder,  mercantile  ideas 
and  the  advent  of  a  period  when  national  wealth 
came  clearly  to  depend  upon  the  size  of  national 
trade  more  than  on  its  direction,  export  duties  fell 
away.  It  is  interesting  to  note  in  this  connection 
that  England  retained  until  the  middle  of  this  cen- 
tury an  export  duty  on  coal,  supposedly  for  the  pro- 
tection of  her  deposits  from  depletion.  The  fail  of  ex-' 
Turkey  is  now  the  only  country  where  port  duties. 
export  duties  form  an  important  item  of  revenue. 
There  the  duty  is  1  per  cent  of  all  exported  com- 
modities. Switzerland,  Austria,  Russia,  and  Italy 
have  a  few  export  duties  upon  products  peculiar  to 


184         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

their  soil,  the  burden  of  which  is  supposed  to  fall 
upon  the  foreigner.  France  did  away  with  them  in 
1881 ;  Germany  in  1873. 

Import  duties  are  still  very  numerous.  As  a 
branch  of  the  taxes  on  consumption,  their  yield  is 
very  large.  The  German  customs  duties  yield  about 
27  per  cent  of  the  total  imperial  receipts.  Until 
recently,  about  half  of  the  United  States  federal  in- 
come was  from  this  source  ;  now  it  is  slightly  less. 
The  English  customs  duties  yield  25  per  cent  of  the 
gross  receipts,  the  French  15  per  cent,  and  the 
Italian  the  same. 

SEC.  3.  Although  the  fiscal  interests  are  great, 
yet  in  every  important  country  except  England  the 
receipts  from  this  source  are  not  regarded  as  of  any 
greater  importance  than  the  effects  upon  the  indus- 
tries of  the  country.  There  are  then  two  sides  from 
which  these  taxes  must  be  studied  :  (1)  From  the 
side  of  revenue-yielding  capacity;  (2)  from  the 
side  of  the  "  protection  "  afforded  the  industries  of 
the  country  which  levies  them.  While  it  would  be 
The  purposes  undesirable  to  introduce  a  full  discus- 
of  the  customs  sion  of  the  far-reaching  economic  effects 

duties  both  fis-  .  . 

cal  and  poiiti-  °*  protective  duties  upon  industries 
cal-  and  commerce  in  a  treatise  on  finance, 

yet  a  brief  statement  of  these  effects  and  of  the 
main  reasons  which  have  led  great  nations  to  adopt 
these  taxes  is  essential  to  an  understanding  of  their 
nature.  It  is  as  essential  to  know  how  and  why  pro- 
tective duties  are  intended  to  alter  the  existing 


CHAP,  vii  CUSTOMS  DUTIES  185 

economic  conditions,  as  it  is  to  know  how  and  why 
the  income  tax,  for  example,  is  supposed  to  leave 
them  unaltered.1 

SEC.  4.  What  is  the  distinction  between  a  protec- 
tive tariff  and  a  tariff  for  revenue?  It  may  be 
briefly  stated  as  follows  :  A  protective  protective  tar* 
tariff  is  a  scale  of  duties  so  arranged  as  *ff  defin*d- 
to  prevent  importation,  wholly  or  in  part,  and  to 
raise  the  price  of  commodities  from  abroad,  the  pro- 
duction of  which  within  the  country  it  is  intended 
to  encourage.  The  scale  of  duties  is  therefore 
arranged  with  a  view  to  the  supposed  needs  of  the 
industries  which  it  is  intended  to  develop.  A 
tariff  for  revenue,  on  the  other  hand,  aims  to  avoid 
any  effect  upon  industries  within  the  country,  and 
the  duties  are  laid  according  to  prin-  Revenue  tar- 
ciples  similar  to  those  of  the  excise,  iff  defined. 
upon  articles  of  large  consumption  and  great  tax- 
bearing  capacity.  The  term  "  a  tariff  for  revenue 
only"  so  current  in  the  United  States,  is  the  expres- 
sion of  an  unattainable  hope.  A  moment's  considera- 
tion of  the  law  of  international  exchange,2  namely, 
that  the  interchange  of  commodities  between  dis- 

1  To  refuse,  as  Bastable  does,  to  discuss  protective  duties  be- 
cause we  believe  them  "vicious"  and  "uneconomic"  is  not  sci- 
entific.    In  spite  of    the  condemnation  heaped  upon  them  by 
economists  of  the  old  school,  the  people  of  many  great  nations 
have  continued  to  use  them.    This  fact  alone  necessarily  forces 
them  upon  our  attention.     We  must  trace  the  effect  and  incidence 
of  these  taxes  as  of  any  others. 

2  See  Mill,  Prin.,  Bk.  III.,  Chap.  XVII. 


186         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

tant  places  is  determined  by  differences  in  their 
possible  cost  of  production  in  the  same  place,  and 
The  effect  of  not  by  their  absolute  cost  of  production 
^utie^on8  *n  *ke  seParated  interchanging  places, 
trade.  will  reveal  the  fact  that  even  a  very 

small  duty  upon  a  single  commodity  affects  the 
demand  of  the  country  from  which  that  commodity 
comes  for  other  things,  and  indirectly  affects  every 
commodity  manufactured  in  the  country  laying  the 
tax.  The  same  is  true  of  an  excise.  In  fact,  any 
consumption  tax  has  far-reaching  effects.  Strictly 
speaking,  there  can  be  no  such  thing  as  a  tariff  for 
revenue  only.  What  is  meant  by  that  phrase  is  that 
the  tariff  shall  be  so  arranged  as  to  yield  the  needed 
revenue  with  the  least  possible  effect  on  the  trade 
and  industry  of  the  country. 

It  must  be  noticed  that  every  tariff,  even  though 

it  contains  many  protective  features,  also  necessarily 

contains  many  duties  which  are  mainly 

The  two  pur-  J  J 

poses  always  for  revenue.  Thus  in  the  United  States 
conjoined.  even  ^.^  high  protective  duties,  the 

main  revenues  were  obtained  from  the  taxes  upon  a 
few  commodities.  The  receipts  in  1888,  for  ex- 
ample, were  :  from  duties  on  sugar  and  the  like, 
152,000,000  ;  from  wool  and  woollens,  137,000,000  ; 
from  iron  and  steel,  121,000,000  ;  these  three  to- 
gether being  more  than  half  the  entire  receipts 
from  customs  duties. 

SEC.  5.    The  protective  principle  is  widely  applied 
in  every  important  existing  tariff  of  customs  outsido 


CHAP,  viz  CUSTOMS  DUTIES  187 

of  England,  Holland,  Norway,  Belgium,  Switzerland, 
and  Denmark.  This  policy  is  clearly  the  outcome 
of  national  selfishness.  The  attempt  to  direct  in- 
dustry into  certain  lines  by  artificial  means  cannot 
find  support  in  any  system  of  political  Protection  as 
economy  that  regards  the  largest  possible  a  national poi- 
world's  product  as  the  proper  aim.1  lcy' 
The  object  is  rather  the  greatest  possible  diversity 
of  home  products.  In  so  far  as  this  purpose  is 
attained,  it  is  by  the  process  of  shutting  out  com- 
petition and  allowing  the  home  producer  to  collect 
from  home  consumers  a  certain  amount  of  support, 
greater  or  less,  according  to  the  supposed  needs  of 
the  producer  in  question.  In  so  far,  then,  the  actual 
protection  afforded  is  an  item  of  public  expenditure. 
Revenues  collected  by  means  of  higher  prices  author- 
ised by  law  are  spent  in  developing  the  industry 
protected.  It  is  in  every  respect  the  same  as  if  a 
subsidy  were  paid  to  the  manufacturer  or  other  pro- 
ducer, except  that  the  money  goes  directly  to  him 
without  first  passing  through  the  treasury.2 

SEC.  6.    We  turn  now  to  a  treatment  of  the  tax 
character  of  protective  duties:    (1)  In  the  first  place, 

1  See  the  article  by  Professor  Folwell  on  "Protective  Tariffs  as 
a  Question  of  National  Economy,"  in  The  National  Revenues,  a 
collection  of  papers  by  American  economists,  edited  by  Albert 
Shaw,  Chicago,  1888.     Contrary  to  the  popular  opinion  as  to  the 
views  of  economists,  none  of  the  writers  who  have  contributed  to 
this  symposium  finds  it  possible  to  attack  protection  on  a  priori 
grounds. 

2  See  above  on  expenditure  for  protection  of  industry. 


188         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

it  is  clear  that  the  more  "  protection "  the  duty 
gives,  the  less  will  be  the  revenues  afforded  to  the 
A  high  pro-  government,  and  the  greater  the  possi- 
^ieids  little  ^e  reveimes  t°  the  subsidised  producer. 
revenue.  Absolute  protection  means  the  exclusion 
of  the  foreign  commodity  and  no  revenue  to  the 
government.  The  subsidy  that  the  producer  can 
obtain  is  determined  by  the  conditions  of  produc- 
tion ;  it  varies  from  nothing  to  the  whole  amount  of 
the  tax  according  as  the  cost  of  production  varies 
above  what  the  cost  of  the  imported  commodity 
would  be  without  the  duty.  (2)  Above  a  certain 
point  high  duties  tend  to  diminish  the  revenues  to 
the  government,  and  increase  the  subsidy  to  the 
producer,  by  diminishing  the  amount  of  the  com- 
modity imported.  The  point  beyond  which  the 
At  what  point  total  revenues  diminish  is  ascertainable 
yiete™  by  a  Principle  similar  to  that  of  charg- 
est?  ing  what  the  traffic  will  bear.  In  prac- 

tice that  point  can  be  ascertained  by  gradually 
increasing  the  duty  until  it  is  found  that  the  im- 
portation begins  to  diminish,  and  stopping  the  in- 
crease of  the  duty  when  it  is  found  that  the  added 
duty  checks  more  of  the  importation  than  the  in- 
creased duty  compensates  for.  A  tariff  of  customs 
The  cost  of  duties  arranged  throughout  on  this  prin- 
protectionis  {l  ld  fe  revenue  tariff,  and  if 

paid  by  the 

consumer.  universal  would  yield  enormous  sums. 
It  would,  also,  contain  many  protective  features. 
The  burden  of  such  a  tax  would  be  insufferable. 


CHAP,  vii  CUSTOMS  DUTIES  189 

No  such  general  tariff  has  ever  been  enforced. 
(3)  Protection  is  given  only  when  the  price  is  raised. 
The  subsidy  paid  to  the  producer  is  paid  by  the 
consumers  within  the  country.  This  part  of  the 
tax  is  never  shifted  to  foreigners  and  ™  . 

The,  tax  actu- 

generally  remains  on  the  consumer.  (4)  ally  collected 
But  that  part  of  the  tax  which  flows  into  *£££** 
the  treasury  of  the  government  is  not  alwayspaidby 
always,  although  generally,  paid  by  the  the  consumer' 
consumer,  whether  protection  is  afforded  thereby  or 
not.  There  are  a  few  rare  instances  in  which  the 
tax  that  forms  a  part  of  the  government's  revenue 
is  shifted  either  to  the  foreigner,  i.e.  the  producer  or 
the  speculator,  i.e.  the  importer.  These  instructive 
instances  may  be  summed  up  as  follows  :  The  con- 
sumer escapes  that  part  of  the  tax  which  flows  into 
the  treasury  on  purchases  of  commodities  actually 
imported  :  (CL)  When  the  amount  of  the  commodity 
produced  in  the  country  laying  the  tax  is  sufficient 
in  quantity  to  entirely  supply  the  home  market  and 
to  fix  the  price  very  close  to  the  cost  of  production, 
while  the  foreigner  has  at  the  same  time  so  large  a 
supply  that  he  must  enter  that  market  to  dispose  of 

it.     In  this  case,  if  any  revenue  at   all   _ 

J  When  the  for- 

accrues  to  the  government,  it  is  clear  eignerpays 
that  it  is  paid  by  the  foreigner,  who  is  *»  »>"****• 
burdened  by  the  whole  tax  and  may  lose  more, — 
more,  that  is,  if  his  entrance  into  the  market  still 
further  depresses  the  price.  The  home  producer  gets 
no  subsidy.  A  commonly  cited  example  of  this  is  the 


190         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

case  of  rye  in  Germany  in  good  years  when  the  out- 
side crop  is  also  good.  (5)  When  a  new  tax  is  laid 
The  forei  ner  on  SOO(^S  produced  by  the  aid  of  a  large 
pays  the  tax  fixed  plant  for  a  limited  market  which 

temporarily.      ^Q^  ^Q   logt  if    the  price  were  raise(L 

As  long  as  the  producer  is  unable  to  change  the 
nature  of  the  plant,  he  must  pay  the  tax.  An  ex- 
ample is  found  in  the  iron  products  from  the  Rhine 
districts  prepared  for  the  trade  as  "  Sheffield  "  cut- 
lery. England  could  in  this  case  tax  the  foreigner 
until  such  time  as  he  could  change  the  character  of 
his  product.  (<?)  In  the  case  of  commodities  that  are 
used  only  as  the  substitutes  for  something  else  be- 
cause cheaper,  and  which  would,  if  the  price  rose 
The  forei  ner  n^ner  than  that  of  the  commodity  for 
pays  a  part  or  which  they  are  used,  not  be  consumed  at 
ail  of  the  tax.  ^  Jn  t}iis  Q^Q  ^  foreigner  pays  a 

part  or  the  whole  of  the  tax  when  the  alternative 
commodity  is  cheap.  For  example,  rye  in  Germany 
The  forei  ner  w^en  wnea^  is  cheap,  especially  if  at  the 
pays  a  part  of  same  time  the  crop  of  rye  is  short,  (d) 
In  the  case  of  commodities  a  large  part 
of  whose  total  consumption  is  produced  in  the  coun- 
try, but  not  enough  to  absolutely  fix  the  price,  which 
is  still  above  the  cost  of  production.  The  foreigner 
in  that  case  may  pay  part  of  the  tax,  since  his  arrival 
The  speculator  depresses  the  price,  (e)  The  speculator 
pays  the  tax.  regularly  pays  the  tax  in  those  frequently 
recurring  instances  when  the  commodity  is  massed 
in  warehouses  on  the  border  ready  for  importa- 


CHAP,  vii  CUSTOMS  DUTIES  191 

tion  on  a  rise  in  the  price,  and  on  being  imported, 
at  the  order  of  various  speculators,  in  large  masses 
depresses  prices  again.  It  is  a  pretty  well-estab- 
lished fact,  from  the  investigations  of  Cohn  and 
Kandtorowicz,  that  the  speculators  on  the  Exchange 
as  a  whole  lose  more  than  they  gain.  This  loss  is  in 
part  the  consumer's  gain  through  the  relief  from 
taxation.1 

SEC.  7.  Customs  duties  regarded  merely  as  a 
source  of  revenue  depend  upon  the  same  principles 
exactly  as  those  which  underlie  excises  used  for 
that  purpose.  The  greater  revenue  is  obtained 
with  the  least  expense  from  a  few  simple  duties 
upon  important  commodities. 

Technically,  customs  duties  are  of  two  kinds,  ac 
cording  as  they  are  levied  upon  goods  in  bulk  irre 
spective  of  their  value,  or  the  contrary.   g  ecificand 
This  technical  distinction  is  of  great  im-  ad  valorem 
portance  in  determining  the  incidence  of  c 
these  taxes.     Duties  levied  according  to  the  value  of 
the  imported  commodities  are  known  as  ad  valorem; 
those  according  to  weight,  bulk,  or  other  unit  of 
measurement,  are  known  as  specific.     The  latter  fall 
most  heavily  upon  the  coarser  or  cheaper  grades  of, 
commodities.     Such  a  tariff  is,  therefore,  regressive 
and  contrary  to  the  spirit  of  many  consumption  tax 

1  See  the  masterly  treatment  of  the  whole  of  this  intricate  sub- 
ject by  Lexis,  "Handel,"  in  Schonberg's Handbuch,  2ded.,  Vol.  II., 
XXL,  sec.  77;  also  Conrad,  in  his  Jahrbuch,  XXX VII.;  Cohn, 
"  Zeitgeschafte  und  Differenzgeschafte,"  in  Hildebrand*  s  Jahr- 
buch,  VII.,  p.  388  ;  brought  down  to  date  in  1890  by  Kandtorowicz. 


192         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

systems,  which  usually  tax  luxuries  more  heavily  than 
other  commodities.  But  the  great  saving  in  expense, 
and  the  great  ease  of  collecting  and  administering 
specific  duties,  go  a  long  way  in  recommending 
them.  Ad  valorem  duties  demand  more  machinery 
of  administration,  as,  for  example,  the  certification 
of  the  consul  in  the  place  where  the  goods  come 
from  to  the  correctness  of  the  invoice,  a  corps  of 
appraisers,  and  a  careful  examination  or  inspection 
of  all  incoming  goods.  Little  of  this  is  necessary 
in  the  case  of  specific  duties.  Specific  duties  are 
now  retained  mainly  for  simple  commodities  of  uni- 
form value  per  unit,  or  for  rough  groups  of  articles, 
whose  value  is  easily  ascertained. 

The  watching  of  the  frontier  and  the  prevention 

of  smuggling  is  one  of  the  primary  difficulties  that 

have  to  be  overcome  in  the  administra- 

Smuggling. 

tion  of  customs  duties.  Goods  of  high 
value  and  easily  portable  are  not  very  well  adapted 
to  pay  such  duties,  unless  they  can  be  obtained  only 
from  distant  countries  and  are  thus  easy  of  identifi- 
( cation.  Whenever  there  is  a  heavy  excise  on  any 
commodity  there  is  generally  a  correspondingly 
heavy  customs  duty  as  well.  Sometimes  the  im- 
ported commodity  pays  both  the  duty  and  the  excise 
or  a  part  of  the  excise. 

The   political   or  protective   element   in   customs 
duties  has  been  gradually  retreating  in  importance, 
and  the  fiscal  has  correspondingly  advanced.     Stein l 
1  Vol.  II.,  Part  II.,  p.  377. 


CHAP,  vii  CUSTOMS  DUTIES  198 

makes  this  the  sole  law  in  the  history  of  customs 
duties.  It  would  be  best  characterised  as  an  ad- 
vance of  the  fiscal  interest,  leaving  the  The  rise  of  im- 
political  or  protective  interests  the  same 
as  before.  The  pressing  wants  of  na-  dpie. 
tions,  and  the  fact  that  federal  governments  have 
been  well-nigh  confined  to  these  taxes,  has  necessi- 
tated this  advance. 

SEC.  8.  We  may  now  look  at  some  examples  of 
customs  duties.  Those  of  England  are  particu- 
larly instructive.1  The  term  "con-  „.  . 

History  of  cus- 

suetudines"  or  customs,  applied  to  the  toms  duties  in 
duties  levied  upon  imported  and  ex-  En9land- 
ported  commodities  even  before  the  Magna  Charta, 
bespeaks  their  antiquity.  In  the  time  of  the  Nor- 
man kings,  however,  trade  was  insignificant  and  the 
duties  not  very  productive.  The  original  duty  on 
wine  was  one  cask  from  every  cargo  of  between 
ten  and  twenty  casks,  two  from  twenty  or  more. 
What  the  original  duty  on  wool  was  is  not  known. 
Finally  the  system  settled  down  to  a  5  per  cent  tax 
on  all  imports  and  exports.  Down  to  1700,  these 
duties  were  entirely  for  revenue  purposes  and  had  no 
intentional  protective  features.  At  one  time  their 
yield  was  nearly  <£  1,500, 000.  The  eighteenth  cen- 
tury saw  a  changed  policy.  Special  protective  and 
prohibitive  duties  were  established.  This  was 
the  policy  of  the  entire  century,  except  during  the 

1  See  Hall,  History  of  the  Customs  Revenue,  and  Dowell,  History 
of  Taxation. 


194         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

"  long  peace  "  of  Walpole,  1722-1739.  By  1759,  the 
general  charges  were  25  per  cent,  while  many 
commodities,  like  tea,  coffee,  sugar,  wines,  and 
spirits,  paid  even  more.  The  expenses  of  the 
wars  which  marked  the  turn  of  the  century 
led  to  a  general  increase  of  charges  on  revenue- 
yielding  commodities.  Yet  with  all  the  many  in- 
creases in  the  tax  charges  there  was  not  a  corre- 
sponding increase  in  revenues.  In  some  cases,  the 
high  duties  of  the  war  period  exceeded  the  limit  of 
what  the  goods  would  bear.  For  example,  sugar 
paid  duties  ranging  from  20s.  to  39s.  per  hundred- 
weight during  the  first  fifteen  years  of  the  nineteenth 
century.  But  the  annual  income  was  least  when  the 
duties  were  highest.  Consumption  fell  off  half  a 
million  hundredweight  under  the  higher  price.  It 
must  be  noted  that  this  result  was  obtained  in  the 
case  of  a  commodity  not  produced  in  the  country  it- 
self. Salt,  also,  bore  a  heavy  duty  in  this  period  to 
the  lessening  of  the  consumption.  Tea,  coffee,  to- 
bacco, wine,  and  other  foreign  products  were  also 
subject  to  revenue  duties  so  high  as  to  be  close  to, 
if  not  beyond,  the  limit  of  greatest  productivity. 

Interesting  and  instructive  is  the  experience  of 
England  with  protective  duties.  Export  duties  on 
En  land's  raw  material,  or  the  prohibition  of  the 
protective  exportation  thereof,  as  in  the  case  of 
luties.  wool,  was  originally  one  of  the  most 

prominent  features  of  the  English  system.  From  the 
middle  of  the  seventeenth  century  down  to  1825  the 


CHAP,  vii  CUSTOMS  DUTIES  195 

exportation  of  home-grown  wool  was  forbidden. 
Until  1802,  however,  the  importation  of  wool  was 
free.  Then  the  import  duty  rose  rapidly  from  5s. 
3d.  per  hundredweight,  in  1802,  to  56s.  per  hundred- 
weight, in  1819.  To  encourage  the  production  of 
raw  silk,  heavy  duties  were  placed  upon  that  com- 
modity in  1765,  and  not  lessened  until  1825.  Linen 
manufacture  was  encouraged  by  bounties. 

The  chief  battles  over  the  customs  duties  in 
England  were  waged  around  the  "corn-law."1 
Two  things  among  others  of  minor  importance 
seem  to  have  contributed  mainly  to  the  establish- 
ment of  protective  duties  on  bread-stuffs.2  The 
first  was  the  existence  of  heavy  public  burdens  upon 
land,  and  the  desire  to  compensate  land  owners  and 
land  users  therefor.  The  other  was  the  desire  to 
make  England  as  independent  as  possible  of  all 
foreign  nations  for  her  food  supply,  and  to  keep 
even  the  poorer  lands  in  cultivation.  According  to 
the  advocates  of  this  policy,  protection  was  needed 
to  enable  the  proprietors  and  tenants  to  buy  manu- 
factured products.  It  was  the  political  power  of  the 
proprietors  that  enabled  the  policy  to  be  maintained. 
The  various  tariffs  that  prevailed  may  be  conven- 
iently summarised  as  intended  generally  to  maintain 
a  chosen  price,  which  it  was  assumed  would  enable 

1  The  American  student  must  bear  in  mind  that  in  England 
"corn"  means  wheat,  or,  in  general,  bread-stuffs. 

2  See  McCulloch,  Taxation,  p.  206  ;   Wilson,  National  Budget, 
pp.  62  ff.;   Levy,  History  of  British  Commerce,  2d  ed.,  Part  II., 
Chap.  7  j  Hand,  pp.  207  ff. 


196         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

the  producer  to  live,  and  would  not  place  too  heavy 
a  burden  on  the  consumer.  Hence  the  frequent  re- 
course to  a  sliding  scale  by  which  a  higher  duty  was 
imposed  as  the  price  fell.  The  best  example  is  the 
scale  adopted  by  Sir  Robert  Peel  (5  and  6  Viet.  c. 
14),  by  which  the  duty  was  to  be  20s.  per  quarter 
when  the  price  was  60s.  and  51s.,  and  decreased  Is. 
per  quarter  for  every  rise  of  Is.  in  price;  so  that 
the  duty  should  only  be  Is.  per  quarter  when  the 
price  rose  to  70s.  and  over.  The  idea  was,  clearly, 
to  maintain,  if  possible,  a  price  of  at  least  70s.  A 
similar  purpose  underlay  the  earlier  prohibition  of 
importation,  until  the  price  rose  above  80s.  per 
quarter. 

Popular  agitation,  headed  by  the  Anti-Corn  Law 
League,  was  based  upon  the  hope  of  cheaper  food 
The  elimina-  supplies.  It  was  supported  by  the  rapidly 
tl°otective  growing  manufacturing  interests  in  the 
features.  expectation  that  cheaper  food  would  re- 
sult in  a  fall  in  wages.  After  years  of  effort,  it 
brought  about  the  repeal  of  the  corn  laws  in  1846. 
The  sympathy  aroused  by  the  Irish  famine  of  the 
same  year  contributed  to  this  end.  Just  before 
the  repeal  of  the  corn  laws  Peel  had,  in  1842, 
simplified  the  whole  tariff  by  eliminating  many 
of  the  protective  features,  especially  by  remov- 
ing duties  on  raw  material  and  freeing  a  num- 
ber of  small  articles.  As  a  substitute  source  of 
revenue  the  income  tax  was  restored.  Gladstone, 
in  1860,  completed  the  removal  of  protective  feat- 


CHAP,  vii  CUSTOMS  DUTIES  197 

ures.  Since  that  time  it  has  been  true,  in  the  words 
of  Bastable,  that  "the  English  customs  system  is 
remarkable  for  its  vigorous  adherence  to  the  prin- 
ciple of  purely  financial  duties.  All  traces  of  a  polit- 
ical aim  in  the  imposition  of  customs  duties  have 
now  disappeared."  Customs  yielded  £20,164,114 
in  1894  from  the  following  articles:  — 

Spirits:  rum,  £1,938,181;  brandy,  £1,364,058; 
gin,  £154,088 ;  others,  £674,257 ;  beer,  etc.,  £14,- 
582;  tea,  £3,493,094;  tobacco,  etc.,  £10,119,954; 
wine,  £1,210,141;  chicory,  £57,130;  cocoa,  £102,- 
665;  coffee,  £164,985;  currants,  £120,977;  figs, 
plums,  and  prunes,  £55,135 ;  raisins,  £189,160 ;  all 
others,  £4,886. 

There  are  now  only  40  rates  in  the  English  cus- 
toms tariff.  In  1875  there  were  53,  as  against  397 
in  1859,  and  1046  in  1840. 

SEC.  9.    The  difficulty  of  administering  customs 
duties  in  the  small  and  scattered  areas  of  the  differ- 
ent  States  of  Germany  led  to  the  for-   The  German 
mation   of  the    German   customs   union  customs 
(Zollverein)  in  1833.     This  union,  which  uuion' 
at  first  embraced  a  population  of  25,000,000  and  a 
territory  of  80,600  square  miles,  grew  in  size  and  in 
permanence  with  the  renewal,  from  time  to  time, 
of   the   treaties   which   bound   together  the    States 
composing  it,  and  with  the  entrance  of  new  States, 
so  that   in  1854   it   embraced   98,000   square   miles 
and   35,000,000   inhabitants.       It   was    the   core    of 
the    present   German   Empire.      At   the   beginning 


198         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

the  moderate,  mainly  revenue,  duties  of  Prussia 
were  adopted.  In  the  tariff  of  1865  the  rates 
were  lowered  and  many  removed.  Duties  on  grain 
and  on  almost  all  raw  materials  were  removed,  and 
the  duties  on  manufactured  goods  reduced.  The 
free-trade  tendency  which  accomplished  this  change 
lasted  until  long  after  the  formation  of  the  Empire, 
indeed,  down  to  1877. 

The  constitution  of  the  Empire  confers  upon  the 
Imperial  legislature  the  exclusive  power  to  regulate 
customs.  It  may  levy  taxes  to  any  amount  upon 
The  customs  all  articles  exported  or  imported,  for 
of  the  Empire,  revenue  purposes  or  for  protection  or  for 
both.  But  the  Imperial  legislature  cannot  tax  any- 
thing else.  Further  revenues,  if  needed,  can  be 
raised  in  the  form  of  an  apportioned  requisition 
upon  the  commonwealths  of  the  Empire.  The 
growing  need  of  the  Empire  for  revenues  was  ac- 
companied by  a  wave  of  protectionist  sentiment,  so 
that  the  increased  duties  were  more  and  more  pro- 
tective in  character.  It  is  true,  however,  that  the 
revenue  features  were  increased  at  the  same  time. 

Particularly  interesting  is  the  duty  on  grain,  intro- 
duced in  1879,  and  raised  several  times  since  then. 
The  rate  is  now  5  M.  per  100  kilograms  for  wheat 
and  rye,  4  M.  for  oats,  2£  M.  for  barley.  These 
duties  are  in  some  measure  protective  in  ordinary 
seasons.  It  is  frequently  found  that  a  part  of  the 
revenue  which  flows  into  the  treasury  from  this 
source,  especially  in  extraordinary  years,  is  paid  by 


CHAP,  vn  CUSTOMS  DUTIES  199 

others  than  the  consumer.1  Generally,  however, 
the  consumers  pay  the  home  producers  a  goodly  sum 
in  the  shape  of  higher  prices.  The  operation  of 
these  grain  duties  has  been  materially  modified  in 
recent  years  by  the  conclusion  of  commercial  treaties 
with  some  of  the  grain-producing  countries.  The 
main  revenues  from  customs  duties  in  the  Empire 
come  from  coffee,  tobacco,  wine,  and  grain. 

SEC.  10.  France  has  a  highly  developed  system 
of  customs  duties.  By  the  edict  of  1664  Colbert 
attempted  to  reduce  to  a  single  uniform  History  of  the 
scheme  all  the  confused  and  multifarious  French  tariff. 
customs  charges  that  had  come  down  from  feudal 
times  and  were  in  the  hands  of  many  different 
authorities.  The  tariff  thus  established  was  pror 
tective  in  character  and  was  dictated  mainly  by  the 
mercantile  doctrine.  But  many  provincial  duties 
were  left,  and  as  time  went  on  confusion  increased. 
The  Revolution  swept  all  the  old  taxes  away,  and  in 
1791  the  system  which  is  the  basis  of  the  present 
one  was  established. 

The  development  since  then  has  been  gradual. 
Prohibitions  of  imports  and  exports,  so  numerous  in 
the  tariffs  of  the  ancient  monarchy,  have  now  all 
been  removed.  Since  1863  the  only  exceptions  to 
this  statement  are  books  that  infringe  the  Copyright 
law  and  munitions  of  war.  To  ensure  the  proper 
registration,  for  statistical  research,  of  all  traffic, 
there  used  to  be  an  import  charge  on  all  goods  of 
1  See  examples  cited  above,  also  Cohn,  pp.  565  ff. 


^00         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

15  centimes  per  100  francs'  worth  or  50  centimes  per 
100  kilograms,  and  an  export  charge  of  25  centimes 
per  100  kilograms.  These  have  been  removed.1 

During  the  period  subsequent  to  the  Revolution, 
and  down  to  1814,  war  measures  left  no  opportunity 
to  test  the  tariff  of  1791.  The  Restoration  estab- 
lished a  highly  protective  system  at  the  instigation 
of  the  Chambers.  The  Second  Republic  continued 
the  same  policy.  Napoleon  III.,  finding  himself 
unable  to  persuade  the  deputies  to  change  the  tariff, 
removed  many  of  the  prohibitive  duties  by  treaties. 
The  first  of  these  treaties,  with  England  in  1860, 
fixed  the  maximum  ad  valorem  duty  on  English  goods 
at  30  per  cent  for  the  first  four  years  and  25  per  cent 
after  that.  Other  treaties  followed  extending  similar 
privileges  to  other  countries.  In  the  spirit  of  these 
treaties  the  tariff  itself  underwent  many  amend- 
ments, raw  products  were  admitted  free,  duties  on 
foods  were  removed  or  lowered,  and  the  duties  pro- 
tecting the  stronger  manufactures  were  lowered. 
By  1873,  that  is,  after  the  struggle  with  Germany 
was  over,  and  after  the  revenue  system  had  been 
rearranged  to  meet  the  tremendous  burden  which 
The  two  tar-  was  the  consequence  of  the  war,  France 
#*•  had  two  distinct  tariffs.  First,  the  gen- 

eral tariff  built  upon  the  law  of  1791  amended 
many  times.  Second,  a  conventional  tariff  based 

1  On  the  whole  subject  see  Levasseur,  "Recent  Commercial 
Policy  of  France,"  Journal  of  Political  Economy,  Vol.  I.,  No.  1, 
December,  1892. 


CHAP,  vii  CUSTOMS  DUTIES  201 

upon  treaties.  Since  these  treaties  generally  con- 
tained the  clause  granting  each  nation  the  same 
privileges  as  the  most  favoured,  this  tariff  was  more 
uniform  than  the  method  of  construction  would  lead 
one  to  expect.  In  1881  the  general  tariff  was  pretty 
thoroughly  revised  so  as  to  approach  the  treaty  tar- 
iff. Manufactures  were  slightly  protected.  With 
this  as  a  starting-point  new  treaties  were  made. 

One  of  the  most  remarkable  reforms  that  any 
tariff  has  ever  undergone  was  accomplished  in  1892. 
This  was  the  passage  of  two  tariffs  in  a  The  tariff  re- 
single  law.  There  was  first  a  general  formofisy2. 
tariff  or  maximum  which  was  to  be  levied  on  goods 
from  all  countries  not  obtaining  special  privileges 
by  treaties.  Second,  a  minimum  tariff  marking  the 
lower  limit  to  which  the  concessions  might  go.  The 
latter  was  to  be  applied  to  the  native  products  of 
those  countries  which  grant  French  products  re- 
ciprocal privileges.  Both  of  these  tariffs  were  pro- 
tective. There  are  over  700  items  in  the  maximum 
tariff,  but  the  number  on  which  concessions  could  be 
made  was  considerably  less. 

SEC.  11.    The  tariff  history  of  the  United  States 
has  been  written  many  times.1     Its  effects  have  been 
explained  in  many  different  ways.     Not   Tariff  history 
one  of  the  many  histories  is  clearer  and  of  the  United 
more  impartial  than  the  short  statement 
by  Professors  Seligman  and  R.  Mayo  Smith,  printed 

1  Simmer,  History  of  Protection  in  the  United  States;  Taussig, 
Tariff  History  of  the  United  States,  1789-1888. 


202         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

(in  English)  in  the  publications  of  the  Verein  fiir 
Socialpolitik,  1892  (Vol.  XLIX.,  Part  1).  Nothing 
but  the  barest  outlines  can  be  attempted  here. 

The  colonial  policy  of  England  prohibited  the  ex- 
portation of  the  more  important  commodities,  the 
"  enumerated  "  articles,  to  any  country  but  England. 
Importation  was  to  take  place  only  from  British 
ships.  As  was  seen  in  the  chapter  on  protective 
expenditure,  bounties  were  paid  to  encourage  agri- 
cultural products.  The  only  import  duty  in  the 
colonies  was  that  imposed  in  1773  on  rum,  molasses, 
and  sugar  from  other  than  British  colonies. 

After  the  war  of  Independence  there  was  a  move- 
ment to  protect  the  new  industries  which  had  sprung 
up.  As  Congress  did  not,  until  the  adoption  of  the 
new  constitution  in  1789,  have  the  power  to  collect 
duties,  the  commonwealths  tried  to  afford  the  de- 
sired protection.  There  is  naught  but  confusion  in 
these  efforts,  all  of  which,  however,  came  to  an  end 
when  the  commonwealths  were  forbidden  to  levy 
customs  duties. 

The  tariff  was  the  sole  source  of  tax  revenue  which 
the  new  federal  government  had.  It  was,  conse- 
Thebeginning  quently,  largely  utilised  from  the  first. 
of  the  tariff.  Down  to  the  close  of  the  war  of  1812  the 
tariffs  were,  in  effect,  if  not  in  intention,  revenue 
and  not  protective  tariffs.  The  rates  were  generally 
low,  except  on  purely  revenue  articles  like  sugar, 
tea,  coffee,  and  wine.  The  Orders  in  Council,  the 
Berlin  and  Milan  decrees,  on  the  east  side  of  the 


CHAP,  vii  CUSTOMS  DUTIES  203 

Atlantic,  and  the  Embargo  and  Non-Intercourse 
acts,  on  the  west  side,  followed  by  the  war  of  1812, 
gave  absolute  protection  to  American  industries  and 
seriously  lessened  the  growth  of  the  customs  revenue 
of  the  government  for  a  period  of  seven  years.  It  is 
not  surprising,  therefore,  to  find  the  new  industries 
which  had  been  forced  into  existence  during  that 
time  calling  loudly  for  protection  after  the  peace. 
A  strong  protectionist  sentiment  arose  which  in- 
itiated a  policy  that  had  scarcely  more  than  a 
temporary  setback  from  1816  to  1895.  Thebe  innin 
That  policy  was  to  combine  high  pro-  of  the  protect- 
tective  duties  with  important  revenue  weP°hcy- 
duties.  The  main  arguments  advanced  for  and 
against  the  policy  of  protection  have  been  stated 
under  Expenditure.  The  industries  protected  were 
the  textiles,  cotton  and  wool,  and  iron.  Among 
the  revenue  duties  may  be  named  those  on  tea, 
coffee,  and  wine,  and  perhaps  those  on  sugar  and 
tobacco.  The  first  period  of  the  protective  policy 
passed  the  highwater  mark  in  1828. 

The    only   important    setback   which    the    policy 
sustained  before  the  recent  tariff,  was   in   the   so- 
called  free-trade  period  from  1846  to   1860.     The 
act  of  1846  was  heralded  as  a   tariff  for   revenue 
only,  but  it  was  still  highly  protective.    The  so_called 
The  duties  on  the  classified  commodities  free-trade 
ranged  from  5  per  cent  to  100  per  cent ;   per 
the   last   on   spirits.     Some   purely  revenue   duties 
were  removed  entirely,  as,  for  example,  the  duty  on 


204         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

tea  and  coffee.  The  protected  textile  industries  re- 
tained their  duties  for  the  most  part ;  woollens  20 
to  30  per  cent,  cottons  the  same,  iron  30  per  cent. 
All  the  duties  were  made  ad  valorem,  a  change  which 
involved  an  increase  in  the  cost  of  administration. 
A  more  substantial  reduction  was  made  in  1857. 

The  crisis  of  1857  resulted  in  a  serious  decline  in 
the  revenues,  and  just  before  the  civil  war  broke 
The  Morriii  ou"t,  Congress  passed  the  so-called  Mor- 
tariff.  rill  tarif^  March  2, 1861.  This  tariff  in- 

creased the  protective  duties,  especially  on  iron  and 
woollens.  From  the  technical  side  this  act  made  two 
changes  of  note.  First,  specific  duties  were  again 
restored,  second,  the  system  of  so-called  compen- 
sating duties  was  initiated.  This  second  feature, 
which  afterwards  received  a  very  broad  application, 
can  best  be  made  clear  by  an  illustration.  The 
Morrill  tariff  increased  the  duty  on  raw  wool.  To 
compensate  the  manufacturers  for  this,  a  specific 
duty,  supposed  to  represent  the  duty  on  raw  ma- 
terials, was  placed  on  manufactures  of  wool,  to- 
gether with  an  ad  valorem  duty  for  protection. 

Immediately  after  the  passage  of  the  Morrill  act 
the  war  broke  out.  Under  the  pressure  of  the  need 
for  revenues  Congress  passed  a  long  series  of  acts 
The  war  tar-  increasing  the  duties  on  purely  revenue 
*#'*•  articles,  putting  duties  upon  articles 

hitherto  free,  and  raising  as  compensation  the  pro- 
tective duties.  The  idea  of  giving  compensatory 
duties  was  extended  to  cover  the  burden  of  internal 


CHAP,  vii  CUSTOMS  DUTIES  205 

taxes  also.  Thus  the  manufacturers  were,  in  1864, 
given  special  compensatory  duties  to  offset  the  heavy 
internal  taxes.  This  remarkable  protectionist  meas- 
ure, embodied  in  the  act  of  1864,  was  rushed  through 
Congress  with  only  one  day's  -discussion  in  each 
house.  It  represents  the  highest  limit  ever  reached. 
Nearly  1500  articles  were  enumerated ;  the  average 
rate  was  close  to  50  per  cent.  It  shows  the  effect 
of  three  different  forces  :  there  was  (1)  the  desire 
to  increase  the  revenues ;  (2)  the  feeling  that  the 
manufacturer  had  a  good  claim  for  compensation  for 
the  high  taxes  in  general ;  (3)  the  mad  scramble 
to  gain  all  that  could  be  gained  from  this  class  of 
legislation. 

This  act  afterward  received  a  number  of  amend- 
ments to  meet  the  changes  made  in  the  other  parts 
of  the  revenue  system,  but  the  character  of  the  tariff 
was  not  materially  changed  until  1883.  One  of  the 
most  interesting  changes,  technically,  was  the  fixing, 
in  1866,  of  the  method  of  ascertaining  the  value 
upon  which  the  duty  was  laid.  It  was  provided  that 
the  value  should  be  determined  by  adding  to  the 
value,  at  the  place  of  shipment,  the  cost  of  trans- 
portation, packing,  commission,  warehousing,  and 
other  charges  which  fell  upon  the  goods  before 
their  arrival. 

The  protection  policy  thus  extended  gave  strength 
to  vested  interests  which  thereafter  sup- 

Modifications. 

ported  that  policy.     The  only  changes 

of   note   down  to  1894  are  the  attempted  reforms 


206         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

of  1870,  1873,  and  1883,  and  the  McKinley  tariff  of 
1890,  which  reduced  the  income  by  removing  the 
duties  on  purely  revenue  articles  and  on  very  strong, 
self-sustaining  industries,  but  increased  the  protec- 
tive features. 

In  1894  came  a  change  that  is  very  important. 
The  McKinley  bill  of  1890  had  become  practically 
Reduction  of  ^e  pla^^orm  °^  the  Republican  party, 
protective  and  the  Democratic  party  went  into 
power  pledged  to  the  reduction  of  protec- 
tion. They  proceeded  slowly  to  the  fulfilment  of 
these  pledges.  The  famous  Wilson  bill  was  re- 
ported Dec.  19,  1893,  and  became  a  law  Aug.  27, 
1894,  without  the  approval  of  the  Democratic  Presi- 
dent. It  failed  of  his  approval  because  of  the  ob- 
jectionable features  introduced  in  the  Senate.  Two 
things  prevented  the  change  from  being  sweeping. 
The  first  was  the  power  of  the  vested  interests  in 
the  protected  industries.  Every  sort  of  pressure, 
short  of  illegal,  was  brought  to  bear  in  favour  of 
the  existing  system.  The  second  was  the  patent 
danger  of  too  sudden  a  decrease.  Sweeping  reform 
would  ruin  industries  and  create  a  depression. 

The  changes  may  be  roughly  summarised  as 
follows.  Forty-five  articles  previously  taxed  were 

Anal  sis  of  Pu^  on  *^e  ^ree  ^s*'  Among  these  the 
the  recent  most  important  was  wool.  The  duties 
on  woollens  were  "  compensatingly "  re- 
duced to  an  average  of  about  40  per  cent  as  against 
the  old  average  of  nearly  100  per  cent.  Copper  was 


CHAP,  vii  CUSTOMS  DUTIES  207 

made  free,  as  was  also  lumber.  Iron  ore  was,  after 
a  struggle,  left  dutiable.  The  chief  feature  of  the 
McKinley  bill  had  been  the  removal  of  the  duty  on 
sugar.  This  was  restored  to  the  tariff  with  a  duty 
for  the  sake  of  the  revenue.  On  all  the  rest  of  the 
list  the  duties  were  reduced  by  from  20  per  cent  to 
40  per  cent.  It  is  well-nigh  impossible  to  summarise 
the  result  further;  the  items  are  too  numerous  and 
there  is  a  lack  of  guiding  principles.  The  reduc- 
tions carry  the  tariff  lower'  than  it  has  been  at  any 
time  since  the  war.  The  level  of  1857  has  been 
reached  but  in  a  very  few  instances,  though  in  some 
cases  a  lower  limit  has  been  reached.  The  im- 
mediate result  was  a  material  falling  off  in  the 
revenues.  This  is,  however,  due  to  the  coincidence 
of  the  reduction  with  a  serious  industrial  depres- 
sion and  will  probably  not  be  permanent. 


208        INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 


CHAPTER   VIII 

PROPERTY    TAXES 

PART  1.    The  G-eneral  Property  Tax. 

SECTION  1.  In  the  general  property  tax  the 
;  basis  is  the  entire  amount  of  property,  real  and 
The  theory  of  Phonal,  owned  by  the  tax-payer.  It 
the  general  is  usually  paid  out  of  the  income  of  the 
property  tax.  tax-payer  derived  from  any  source,  but 
inasmuch  as  it  forms  a  lien  on  the  property  it  may 
be  paid  from  that.  The  tax  rests,  theoretically, 
upon  one  of  two  ideas  :  (1)  that  property  measures 
faculty ;  (2)  that  property  measures  benefit.  In  the 
older  forms  of  this  tax,  when  there  was  little  oppor- 
tunity to  buy  or  sell  land,  or  to  invest  capital,  it 
was  pretty  generally  true  that  property  did  meas- 
ure faculty.  In  modern  times  the  theory  that 
benefit  can  be  measured  by  property  has  led  to  the 
retention  of  the  tax.  The  fallacy  of  that  theory  has 
been  shown. 

The  general  property  tax  is,  as  we  have  seen,  very 
old.  It  is  still  the  main  reliance  of  Switzerland  and 
the  United  States  for  supplying  the  revenues  of  the 
component  parts  of  the  federal  systems.  Prussia  and 
Holland  have  recently  reverted  to  it.  This  reversion 
to  a  form  of  taxation  which  has  been  the  subject  of 


CHAP,  viii  PROPERTY  TAXES  •     209 

almost  universal  condemnation  suggests  the  necessity 
of  re-examining  the  grounds  upon  which  those  objec- 
tions were  based.  Among  many  there  are  two  of 
great  importance.  (1)  It  is  urged  that  the  tax  is 
unjust  because  property  forms  no  criterion  of  tax- 
paying  ability.  It  is  maintained  that  objections  to 
income  is  a  far  better  basis.  (2)  It  is  this  tax. 
urged  that  the  general  property  tax  is  inexpedient 
because  so  difficult  to  administer  justly,  especially 
in  the  matter  of  the  discovery  and  assessment  of  per- 
sonal property  and  because  of  its  effect  on  the  move- 
ment of  capital  and  forms  of  investment.  Against 
these  serious  objections  it  is  urged  that  when  there  is 
a  tolerably  just  system  of  income  taxation  already  in 
existence  a  property  tax  in  addition  thereto  fulfils  the 
requirements  of  justice  because  it  imposes  a  heavier 
burden  on  "  funded "  income,  which  is  regarded  as 
indicative  of  more  faculty  since  it  is  less  precarious. 
It  also  supplements  the  income  tax  by  making  prop- 
erty in  enjoyment,  the  use  of  which  is  an  indication  of 
tax  faculty,  a  part  of  the  base,  as  for  example  picture 
galleries.  And,  lastly,  the  comparative  steadiness  of 
the  return  from  the  property  tax  is  a  great  recom- 
mendation from  the  fiscal  standpoint.  It  would 
seem,  then,  that  the  objections  to  the  general  property 
tax  as  the  main  part  of  a  system  still  stand, 
but  that  there  may  be  room  for  such  a  when  this  tax 
tax  as  a  subordinate  part  of  a  larger  sys-  ^Justifiable. 
tern,  the  demands  of  justice  being  met  by  the  proper 
relation  between  the  different  parts  of  the  system. 


210         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

In  Switzerland  and  Prussia  the  general  property  tax 
is  part  of  a  more  elaborate  system.  In  the  United 
States  it  stands  almost  alone  for  commonwealth  pur- 
poses, supplemented  in  a  few  isolated  instances  by 
other  taxes  intended  to  reach  certain  forms  of  reve- 
nue-yielding property.  The  universal  condemnation 
of  the  American  commonwealth  general  property  tax 
is  therefore  not  due  to  the  defects  in  the  tax  itself, 
but  mainly  to  the  fact  that  it  is  not  properly  supple- 
mented by  other  taxes. 

The  first  question  that  arises  when  the  general 
property  tax  stands  alone,  and  a  question  which 
although  not  so  prominent  also  arises  in  other  cases 
Can  the  as-  is :  Can  the  method  of  assessment  be 
JJJJJJJJ?*6  made  sufficiently  effective  to  reach  all 
made?  forms  of  property,  especially  personal 

property  ?  The  answer  to  this  question  that  has  been 
given  by  the  experience  of  all  nations,  is  emphati- 
cally in  the  negative.  This  is  especially  true  when 
the  administration  of  the  assessment  is  left  to  offi- 
cials popularly  elected  for  a  short  term.  It  is  also 
in  the  negative,  but  somewhat  less  unanimously  so, 
when  the  assessment  is  under  the  control  of  an 
impartial  bureaucracy  appointed  by  a  monarch  or 
holding  office  practically  for  life.  In  the  United 
States  it  is  notorious  that  almost  all  personal  prop- 
erty escapes. 

The  report  of  the  extensive  investigations  of  the 
Eleventh  Census  (1890)  into  the  matter  of  local  and 
commonwealth  taxation  has  just  been  published. 


CHAP,  vin  PROPERTY  TAXES  211 

The  census  office  undertook  to  ascertain  the  true 
value  of  property,  i.e.  its  fair  selling  value.     This 
serves  as  a  basis  of  comparison  for  the  ^ssessmentin 
assessed  values.      The  investigations  of  the  United 
the  census  were  conducted  with  the  ut-  StatesSails- 
most   care,    and    although    they   inevitably   contain 
many  unavoidable    sources   of    error    they   are    yet 
very  serviceable.     The  following  table  shows  the  re- 
sults of  the  investigations   into  the  true  value  of 
property: 

Real  estate,  with  improvements  thereon    .         .  $39,544,544,333 

Live-stock  on  farms,  farm  implements,  and 

machinery 2,703,015,040 

Gold  and  silver  coin  and  bullion        .         .         .  1,158,774,948 

Mines  and  quarries,  including  product  on  hand  1,291,291,579 

Machinery  of  mills,  and  product  on  hand           .  3,058,593,441 

Railroads  and  equipments,  including  street  rail- 
roads    8,685,407,323 

Telegraphs,  telephones,  shipping,  canals,  and 

equipment 701,755,712 

Miscellaneous 7,893,708,821 

Total  .......  $65,037,091,197 

The  total  assessed  valuation  was  $25,473,173,418 
or  about  40  per  cent  (41  per  cent  if  we  allow 
for  $3,833,335,225  exempt  by  law).  Of  real 
estate,  —  land  and  its  improvements,  —  the  true 
value  was  $39,544,544,333,  of  which  all  but 
$3,833,335,225  is  legally  subject  to  taxation;  the 
assessed  value  of  the  $35,711,209,108  taxed  was 
$18,956,556,675,  a  little  over  50  per  cent  of  its 
true  value.  The  $25,492,546,864  of  personal  prop- 


212         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

erty  was  assessed  at  $6,516,616,743,  about  25  per 
cent.  But  if  we  make  allowance  for  the  $1,291,- 
291,579  worth  of  mines  and  quarries  which  might 
be  well  classed  as  real  estate,  personal  property  is 
assessed  at  about  22T5Q-  per  cent  of  its  true  value. 
As  the  statement  of  the  total  amount  of  personal 
property  errs  admittedly  on  the  side  of  moderation, 
there  being  some  forms  which  were  not  ascertain- 
able,  this  showing  is  more  favourable  to  the  assess- 
ment than  the  truth  would  be.  It  is  well  within 
the  truth  to  say  that  in  the  United  States  as 
a  whole  not  more  than  20  per  cent  of  personal 
property  is  taxed.  Probably  considerably  less  than 
this  is  the  true  figure.  In  many  important  com- 
monwealths the  assessment  of  personal  property  even 
according  to  the  favourable  showing  of  the  census 
is  far  below  the  average  for  the  whole  country.  In 
the  country  as  a  whole,  personal  property  is  about 
71  per  cent  of  real  estate  or  41T5^  per  cent  of 
all  taxed  property.  In  New  York  it  is  assessed 
at  a  trifle  over  11  per  cent  of  the  real  estate  and 
about  10  per  cent  of  all  property.  According  to 
the  census  valuation  there  was  in  New  York  $5,817,- 
704,667  worth  of  real  estate  and  $2,758,997,324 
worth  of  personal  property.  Real  estate  was  as- 
sessed at  $3,403,751,246,  or  about  58  per  cent 
of  its  real  value,  while  personal  property  was  as- 
sessed at  $382,159,067,  or  not  quite  14  per  cent 
of  its  real  value.  When  it  is  remembered  that 
the  census  report  omits  some  unascertainable  items 


CHAP,  viii  PROPERTY  TAXES  213 

of  personal  property  it  is  fair  to  say  that  90  per 
cent  of  the  personal  property  in  New  York  is  un- 
taxed,  where  at  the  same  time  only  42  per  cent 
of  real  estate  is  untaxed.  This  means  that  the 
assessment  of  personal  property  is  evaded  and  that 
real  estate  is  assessed  below  its  actual  value.  The 
latter  fault  is  not  so  bad  as  the  former  because  gen- 
eral under-assessment  means  merely  a  higher  rate 
than  would  otherwise  prevail,  but  does  not  affect 
the  distribution  of  the  burden.  Pennsylvania,  Mas- 
sachusetts, and  Ohio  show  somewhat  better  assess- 
ment of  personal  property.  Thus  in  Pennsylvania 
the  assessed  value  of  personal  property  is  618  mill- 
ions against  2042  millions  of  real  estate ;  Massachu- 
setts, 554  millions  against  1600  millions;  Ohio,  546 
millions  against  1232  millions.  But  no  one  supposes 
that  there  is  any  more  personal  property  owned  in 
these  commonwealths  than  in  New  York.  In  fact 
the  contrary  is  the  case.  In  some  of  the  newer  west- 
ern States  the  assessment  of  personal  property  is 
larger  than  the  assessment  of  real  estate.  Thus  in 
Montana  personal  property  is  58  millions,  real  estate 
55  millions ;  in  Wyoming  the  ratio  is  20  : 13 ;  New 
Mexico,  28  :  15  ;  Arizona,  18  :  10 ;  Nevada,  17  :  9  ; 
Idaho,  16  : 10.  But  this  is  easily  explained.  (1)  In 
these  States,  land  values  have  not  yet  developed. 
(2)  The  real  property  assessed  is  only  such  lands, 
with  their  improvements,  as  have  fully  passed  into 
the  hands  of  private  owners.  (3)  Personal  property 
is  swelled  by  including  in  it  the  improvements  upon 


214         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

public  lands  the  fee  to  which  is  still  vested  in  the 
United  States,  and  upon  railroad  lands  the  title  to 
which  is  still  vested  in  the  railroad  companies. 
(4)  The  list  of  personal  property  is  swelled  by  the 
nature  of  some  of  the  industries  that  prevail, — cattle. 
A  certain  amount  of  it  is  due  to  the  assessment  of  rail- 
road property  as  personal  property.  (5)  The  possibil- 
ity of  concealing  property  is  less  in  a  country  where 
population  is  sparse  and  the  conditions  for  invest- 
ment well  known  to  the  assessors.  (6)  The  need  of 
revenues  is  very  great  and  real  estate  has  not 
enough  value  to  bear  the  burden.  Personal  prop- 
erty must,  therefore,  be  called  in  to  raise  the  neces- 
sary amount  without  inordinately  high  rates.  The 
chart  on  the  opposite  page  taken  from  the  Eleventh 
Census  shows  the  relative  assessment  of  personal 
and  real  property  in  all  the  States. 

The  failure  to  assess  personal  property  is  due  en- 
tirely to  the  laxity  of  administration ;  the  tax  laws 
The  failure  to  on  the  subject  are  universally  strict 
reachpersonai  enough  to  answer  every  requirement. 

property  not 

due  to  faults  What  constitutes  personal  property  is 
in  the  laws.  explicitly  stated ;  the  assessors  have 
ample  power  to  ascertain  its  exact  amount.  In 
a  large  majority  of  commonwealths  (all  but  four- 
teen) the  tax-payer  is  required  to  make  a  declara- 
tion of  his  property.  In  all  the  States  the  assessors 
have  the  advantage  of  large  powers  of  investiga- 
tion, and  can  ascertain  the  amount  of  the  prop- 
erty if  they  will  assert  their  power.  But  this  is 


CHAP.  VIII 


PROPERTY  TAXES 


215 


ASSESSED  VALUATION   OF  PROPERTY  TAXED. 

Personal 
Real  Estate.                                                 States.              Property. 

MJJJJ 

N.  Y. 

|^  m 

PENN. 
MASS. 
OHIO 

mm 
mm 

mm 

•• 
•BE 

mm 

• 
i 
i 

••••••••            CAL. 

m 

mmmmmmm]      MICH. 

•j 

• 

mam 

BB 

MO. 

mm 

i 

i 

mm 

mmm 

ILL. 

mm 

i 

mm 

mm 

N.J. 

mm 

• 

i 

mm 

mm 

IND. 

mm 

i 

mm 

mm 

TEXAS 

•B 

mm 

mmmm 

mm 

mmmm 

MINN. 

1 

•n 
• 

mra 

mm 

WI8. 

MX 

H 

• 

mm 

KY. 

H 

• 

mm 

IOWA 

• 

1 

mm 

TENN. 

• 

mm 

VA. 

mm 

CONN. 

mm 

R.I. 

HH 

KAN. 

mm 

ME. 

g 

S          g 

S   3 

fWf 

GA. 

B 

o~ 

g"             o~ 

g"  g- 

mt 

WASH. 

^. 

^                - 

-  H. 

H| 

LA. 

§ 

§           8 

§    § 

•J 

COLO. 

* 

8          8" 

o     o- 

ALA. 

N.C. 

N.H. 
D.C. 

•LjHMB^  Personal 

W.VA. 

- 

- 

tmm 

•• 

Real  Estate 

MISS. 
NEB. 

As: 

233 

m 

l  it 

VT. 

i 

IB 

Personal 

ARK. 

OREG. 

8.0. 

1 

8.C. 

I 

UTAH 

N.D. 

1 

DEL. 

1 

FLA. 

1 

| 

MONT. 

1 

1 

N.M. 

WYO. 

ARIZ. 

IDAHO 

NEV. 

216         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

what  locally  elected  assessors  are  very  reluctant 
to  do. 

The  questions  as  to  the  expediency  and  justice  of 
a  progressive  rate,  as  to  the  exemption  of  small 
properties,  and  the  like,  have  already  been  treated. 
The  assess-  The  advisability  of  extending  the  as- 
ment  of  legal  sessment  to  legal  persons  so  as  to  cover 

persons  under  ±-u  •    -LO. 

the  general  a  certain  amount  of  property  that  might 
property  tax.  escape  in  the  guise  of  personal  property, 
depends  upon  the  strictness  in  the  assessment.  The 
stocks  and  bonds  of  railroad  companies  are  easily 
concealable  personal  property  of  the  individual  stock- 
holder. But  the  road  and  buildings  are  easily  ascer- 
tainable  real  property  of  the  companies.  For  ease 
of  assessment,  therefore,  it  is  best  to  tax  legal  per- 
sons as  well  as  real  persons.  But  in  that  case  stocks 
and  bonds  in  the  hands  of  private  persons  should  be 
exempt,  unless  it  is  intended  to  tax  such  property 
more  heavily  than  other  property  ;  i.e.  to  introduce 
a  partial  progression.  Whether  in  addition  to  in- 
cluding legal  persons  in  the  general  property  tax  a 
special  corporation  tax  should  be  imposed  is  a  ques- 
tion of  policy  affecting  the  whole  tax  system. 

When  the  general  property  tax  stands  alone,  all 
The  taxation  tax  faculty  that  exists  in  the  form  of 
of  faculty  in  receipts  of  the  economic  character  of 

the  form  of  .  . 

wages  not  ao  wages,  —  salaries,  fees  for  professional 
complished.  services  in  independent  .  professions, 
profits  and  earnings  of  management,  —  are  untaxed. 
In  the  earlier  forms  of  the  property  tax  in  the 


CHAP,  viii  PROPERTY  TAXES  217 

United  States  this  omission  was  seen,  and  a  special 
tax  levied  upon  such  income.  But  at  present  that 
method  of  taxation  has  almost  entirely  disappeared. 
The  technical  arrangements  for  the  assessment  of 
this  tax  vary  very  much.  In  some  cases  the  method 

of  rather  permanent  cadastres  is  feasible 

Assessment. 
for  a  large  part  of   the  property.     It  is 

necessary  to  make  an  annual  investigation  into  the 
amount  of  personal  property  held  by  the  different 
tax-payers,  inasmuch  as  this  changes  very  rapidly. 
But  there  is  less  necessity  for  such  revision  in  the 
case  of  the  real  estate.  A  very  simple  cadastral  sys- 
tem with  revision  every  five,  ten,  or  fifteen  years,  is 
in  use  in  a  good  many  commonwealths  of  the  United 
States  for  commonwealth  taxation,  but  annual  as- 
sessments are  in  vogue  for  almost  all  local  pur- 
poses. Thus,  in  Rhode  Island,  the  Assembly  fixes 
the  assessment  or  apportionment  of  the  common- 
wealth taxes  whenever  there  seems  need  of  revision ; 
in  Michigan  it  is  done  once  in  five  years ;  in  Ver- 
mont once  in  four  years ;  in  Ohio  once  in  ten  years. 
No  matter  what  changes  may,  meanwhile,  occur  in 
the  value  of  property  in  the  towns,  the  share  of 
each  remains  the  same  for  commonwealth  purposes. 
Most  of  the  commonwealths,  however,  require  the 
regular  addition  of  improvements  and  alterations. 

SEC.  2.    The  property  tax  as  the  sole  Scientific 
or  chief  form  of  direct  taxation  has  no  St^^f 
supporter  among  scientific  writers.     So  property  tax. 
universal  and  unanimous  has  been  the  condemna- 


218         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

tion  heaped  upon  this  tax  that  we  must  consider 
in  detail  some  of  the  objections  that  have  been 
raised. 

Professor  Seligman  sums  up  his  interesting  dis- 
cussion of  this  tax  in  words  to  the  following  gen- 
eral import : 

The  general  property  tax  is  a  failure  as  the  main 
source  of  revenue  from  the  triple  standpoint  of 
history,  theory,  and  practice. 

1.  Historically,  it  was  once  well-nigh  universal. 
In   a   community   mainly   agricultural    it    was    not 
altogether  unsuited  to  the  conditions.     But  as  soon 
as   industry   and    commerce    became   important,   it 
failed  to  extend  so  as  to  comply  with  the  require- 
ments of  justice.     It  became  in  fact,   even  where 
not  so  considered,  a  tax  on  real  property.     Every- 
where but  in  America  it  has  been  (a)  divided  into 
a  number  of  subordinate  property  taxes,  (5)  allowed 
to  become  a  subordinate  member  of  another  system, 
or  (e)  entirely  abandoned.     Sooner  or  later  it  will 
have  to  be  abandoned  in  America. 

2.  Theoretically  the  general  property  tax  is  defi- 
cient in  two  respects.     First,  it  assumes  that  there  is 
an  ascertainable  general  property.     But  since  prop- 
erty is  a  composite  of  inseparable  but  widely  differ- 
entiated elements  this  assumption  is  contrary  to  the 
fact.      "  The  general  mass  of   property  has  disap- 
peared and  with  it  vanishes  the  foundation  of  the 
general   property  tax."     Secondly,  "property  is  no 
longer  a  criterion  of  faculty  or  of  tax-paying  abil- 


CHAP,  viii  PROPERTY  TAXES  219 

ity."  Two  equal  masses  of  property  may  be 
unequally  productive  [because  used  by  men  of  dif- 
fering talents,  and  thus  differently  joined  with  the 
personal  element,  or  because  the  possession  of  them 
may  give  rise  to  fortuitous  gains,  or  because  the 
owner  of  one  mass  of  property  may  be  labouring 
under  peculiar  economic  disadvantages]. 

It  is  the  income  which  property  yields  that  is  the 
best  index  of  the  tax -paying  power  which  the  prop- 
erty represents. 

3.  Practically,  "the  general  property  tax  as  act- 
ually administered  to-day  is  beyond  all  peradventure 
the  worst  tax  known  in  the  civilised  world."  As  at 
present  administered  it  fails  entirely  to  reach 
intangible  property.  It  debases  public  morals  by 
putting  a  premium  on  dishonesty.  It  is  regressive 
and  presses  hardest  upon  those  relatively  least  able 
to  pay.1 

This  is  strong  language, — even  stronger  has  been 
used.  But  no  words  are  too  strong  to  express  the 
iniquities  of  this  tax. 

PART  II.    Special  property  taxes. 

SEC.  3.    The  land  tax  is  one  of  the  oldest  contri- 
butions.    It  has  three  forms :   (1)  it  may  be  based 
upon  each  unit  of  area,  sometimes  with  Forms  of  the 
an  attempt  to  classify  the  different  units  land  tax- 
in  fertility;   (2)  it  may  be  based  upon  the  estimated 
value   of  the  land   or   upon   an   estimated  average 
1  Seligman,  Essays,  pp.  23-61. 


220         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

annual  yield  or  surplus;  (3)  it  may  be  based  upon 
the  actual  yearly  yield,  and  be  as  it  were  a  share  in 
the  product.  The  tax  was  common  in  the  latter 
part  of  the  middle  ages  as  a  recognition  of  the 
monarch's  right  of  proprietorship  in  the  soil.  A 
good  example  of  this,  among  many  others,  is 
afforded  by  the  so-called  quit-rents  in  the  American 
colonies.1  In  their  first  form  these  payments  are 
not  strictly  taxes.  They  are  acknowledgments  of 
the  people's  tenure.  But  they  frequently  grow  into 
taxes.  In  France,  as  we  have  seen,  the  taille  devel- 
oped from  feudal  dues.  The  impot  fonder  now 
yields  255,000,000  francs.  In  England  the  old  land 
tax  has  been  converted  into  a  redeemable  rent 
charge,  but  the  revenue  from  land  is  still  taxed  in 
the  general  income  tax  and  yields  <£  1,500,000  annu- 
ally. Local  taxation  falls  largely  on  land.  In 
Prussia  the  land  tax  was  in  1895  transferred  en- 
tirely to  the  local  bodies. 

Economic  rent  as  the  surplus  of  revenues  from 
land,  after  all  expenses  have  been  deducted,  has 
always  been  regarded  as  a  legitimate  object  of 
taxation.  It  has  been  strongly  argued  that  this  tax 
cannot  be  shifted.  But  as  the  land  tax  is  not 
always  confined  to  rent-bearing  land,  being  gener- 
ally imposed  upon  all  land,  even  the  poorest  in  cul- 
tivation, and  as  modern  economic  theory  does  not 
regard  rent  as  an  inevitable  surplus,  this  old  argu- 
ment needs  thorough  revision.  (See  Chapter  X.) 
1  See  Ripley,  and  Wood. 


CHAP,  vni  PROPERTY  TAXES  221 

It  is  in  the  assessment  of  this  tax  that  the  cadastre 
has  been  most  widely  used.  The  principles  upon 
which  the  best  cadastres  have  been 
built  are  the  following:  (1)  A  careful 
measurement  of  the  land  is  made  and  recorded. 
In  the  older  ones  the  land  is  entered  in  rough  his- 
torical units:  the  "yoke,"  the  "hide,"  the  "seed." 
Sometimes  the  cadastre  is  intended  to  serve  other 
purposes,  as  that  of  a  record  of  titles.  In  any  case 
the  names  of  the  owners  or  occupiers  are  entered 
with  each  piece.  (2)  A  record  is  made  of  the  yield 
of  each  unit  of  area  and  from  that  is  estimated  either 
the  gross  revenue  or  the  net  revenue,  —  more  fre- 
quently the  latter.  As  a  rule  the  cadastral  revenue 
is  less  than  the  actual  net  revenue.  Another 
method  is  that  of  recording  the  market  value. 

The  cadastre  when  finished  is  subject  to  more  or 
less  frequent  revision.  A  partial  revision  which 
involves  the  recording  of  changes  of  title,  etc.,  is 
generally  made  currently.  An  entire  revision  is 
only  undertaken  after  periods  of  considerable 
length.  The  making  of  a  complete  cadastre  is  a 
matter  of  considerable  expense  and  takes  no  little 
time.  In  many  cases  more  than  the  mere  land 
is  recorded,  buildings  and  other  improvements 
being  frequently  entered  in  the  same  cadastre. 

It  is  generally  urged  in  justification  Justification 
of  the  retention  of  the  land  tax  even  in  %j%*^ 
countries  where   there   are   other   taxes  other  taxes. 
that  fall  upon  the  revenue  from  land,  that  the  in- 


222         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

come  accruing  from  land  is  constantly  increasing  in 
every  growing  community,  and  that  the  expenditure 
of  the  government  accrues  largely  to  the  benefit  of 
the  land-holders,  and  appears  in  the  form  of  an  in- 
creased value  or  rental.  The  same  reasons  are 
urged  in  support  of  a  higher  rate  for  the  land  tax. 

On  the  basis  of  a  cadastre  the  land  tax  is  gen- 
erally apportioned ;  less  frequently  it  is  propor- 
tioned. In  general  the  tax  lends  itself  better  than 
most  others  to  the  apportionment  method.  With 
a  fixed  valuation  as  a  basis  which  varies  com- 
paratively little  from  year  to  year,  it  seems  per- 
fectly natural  and  easiest  to  apportion  the  amount 
that  it  is  desired  to  raise,  among  the  different 
pieces  or  units. 

SEC  4.  The  older  forms  of  the  land  tax  often  in- 
cluded the  building  tax,  with  which  it  was  closely 
The  building  connected  in  character.  At  present, 

^anofthe11^  this  contribution  generally  forms  an  in- 
tend tax.  dependent  tax  on  the  revenue  from  the 
site  and  the  building.  It  is,  like  the  land  tax,  a  tax 
on  a  fixed  source  of  income.  Its  incidence  will  receive 
special  attention  elsewhere. 

The  buildings  taxed  may  be  classified  according  to 
value,  or  according  to  the  uses  to  which  they  are  put, 
Forms  of  the  or  according  to  their  location,  whether 
building  tax.  urban  or  rural.  There  are  two  very  dif- 
ferent forms  of  the  building  tax  :  one  is  intended  to 
fall  on  the  income  derived  by  the  owner  from  the 
building ;  the  other  simply  taxes  the  occupier  ac- 


CHAP,  vin  PROPERTY  TAXES  223 

cording  to  the  rent,  taken  as  the  index  of  a  certain 
amount  of  tax  faculty  on  his  part.  The  second  is 
very  much  like  a  consumption  tax.  The  first  re- 
gards the  revenue  derived  as  a  source  from  which 
the  tax  may  be  paid.  But  even  this  first  form,  when 
paid  by  an  owner  who  is  also  an  occupier,  is  very 
much  like  a  consumption  tax. 

The  building  tax,  wherever  in  use,  is  one  of  a 
number  of  other  similar  taxes ;  it  never  stands 
alone.  In  ease  of  assessment  it  has  many 
advantages.  The  valuation  is  simple 
and  inexpensive.  Alterations  affecting  the  base  can 
be  easily  and  accurately  ascertained.  Unlike  the 
land  tax  the  building  tax  is  regularly  assessed  eactj, 
year.  Hence  this  tax  is  more  often  proportioned 
than-  apportioned.  The  building  tax  may  be  ex- 
tended into  a  sort  of  industry  tax,  as  when  it  is 
assessed  with  higher  rates  upon  buildings  used  for 
industrial  or  commercial  purposes.  An  example  of 
this  method  of  assessing  the  business  tax  is  that 
of  France  cited  above. 

SEC.  5.    The   taxes  we   have   already   considered 
cover  most  fixed  capital.      Circulating  capital  also, 
in  all  of  its  many  forms,  has  been  sub-   Taxation  of 
jected  to  separate  taxes.     This  is  as  true  caPital- 
of  those  countries  which  have  the  general  property 
tax  as  of  those  which  attempt  to  accomplish   the 
desired  results  by  the  taxation  of  the  various  ele- 
ments of  revenue.     How  to  reach  this  kind  of  reve- 
nue and   to  make   the  faculty  which  it  represents 


224         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

bear  its  share  of  the  public  burden,  is  one  of  the 
most  difficult  practical  problems  of  taxation.  The 
chief  difficulties  arise  from  the  elusive  nature  of 
circulating  capital  and  the  intimate  way  in  which 
it  is  connected  with  many  of  the  processes  of  indus- 
trial life.  Justice  and  equality  demand  its  taxation. 
But  various  pleas  of  expediency  are  against  it. 
Capital  is  hard  to  reach,  and  if  it  is  not  fairly 
taxed  the  result  may  be  injurious  to  trade.  There 
are  two  forms  in  which  this  tax  has  been  applied 
with  some  effectiveness.  One  is  that  of  a  tax  on 
mortgages,  the  other  that  of  a  tax  or  taxes  on 
corporations  and  banks.  Some  results  have  also 
been  attained  by  the  attempt  to  tax  stocks  and 
Taxation  of  bonds.  Public  stocks  are  especially  easy 
public  bonds.  of  assessment.  But  there  is  an  objec- 
tion to  taxing  them  when  the  other  forms  of  in- 
vestment escape,  because  of  the  bad  effect  on  public 
credit.  If  it  is  distinctly  declared  beforehand  that 
the  bonds  are  to  be  taxed,  their  selling  price  is 
lowered.  If  it  is  not  so  declared,  at  the  time  of 
issue,  and  the  tax  is  subsequently  assessed,  the 
process  is  regarded  by  the  holders  as  equivalent 
to  a  partial  repudiation  of  the  debt,  and  sub- 
sequent loans  are  looked  upon  askance.  When, 
however,  all  forms  of  revenue-yielding  capital  are, 
nominally  at  least,  subject  to  taxation,  this  objec- 
tion to  taxing  public  securities  disappears.  If 
the  tax  is  not  to  have  the  effect  of  reducing  the 
capital  value  of  the  stock,  bond,  or  other  secu- 


CHAP,  viii  PROPERTY  TAXES  225 

rity,  it  must  fall  upon  every  form  of  capital. 
But  so  great  are  the  difficulties  of  making  it 
thus  universal  that,  as  a  general  rule,  such  a  tax 
affects  the  rate  of  interest  on  all  new  investments 
in  the  taxed  form.  This  question  will  receive 
further  attention  under  the  head  of  incidence. 

Where  there  is  a  complete  system  of  public  rec- 
ords for  deeds,  mortgages,  and  contracts,  necessary 
to  their  validity,  it  is  comparatively  Taxation  of 
easy  to  tax  these  recorded  securities,  mortgages. 
Thus  it  is  that  mortgages  are  generally  easily  tax- 
able. This,  however,  results  in  inequality  if  the 
tax  is  not  extended  beyond  the  recorded  contracts. 
When  the  mortgage  is  upon  property  already  taxed, 
as,  for  example,  by  the  building  tax  or  a  general 
property  tax,  the  question  arises  whether  both  the 
borrower  and  the  lender  should  be  taxed,  or  only 
one,  and  if  so  which  one.  An  able  writer  says  on 
this  point,  "Tax  the  mortgagee  on  the  amount  of 
the  mortgage,  and  the  mortgagor  on  the  value  of  the 
property  minus  the  mortgage.  That  is  the  only 
rational  system."1  Indeed,  it  would  be,  if  every 
other  form  of  capital  were  taxed;  but  when  that  is 
not  the  case,  the  result  is  in  every  respect  the  same 
as  though  the  owner  were  taxed  alone.  Generally 
he  pays  more. 

Taxation  at  the  source  has  been  warmly  recom- 
mended for  reaching  interest  on  capital ;  i.e.  to  have 
the  debtor  advance  the  tax  and  shift  it  if  he  can 
1  Political  Science  Quarterly,  V.,  36. 


226         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

to  the  lender  or  share  it  with  him.  In  the  case  of 
corporations,  this  method  is  applied  to  the  dividends. 
stoppage  at  As  Bastable  has  well  shown,1  such  a 
the  source.  ^ax  js  a  combined  tax  on  interest  and 
on  profits,  and  is  therefore  partly  outside  our  present 
Taxation  of  purpose.  The  taxation  of  corporations 
corporations.  is  not  always  the  taxation  of  circulat- 
ing capital  merely.  Corporations  often  own  other 
taxable  property,  —  land,  buildings,  etc.  But  in  the 
United  States,  one  of  the  main  objects  of  the  intro- 
duction of  taxes  on  corporations  was  to  reach  forms 
of  personal  property  that  generally  escaped.  The 
other  object  was,  of  course,  to  extend  the  general 
property  tax  to  cover  all  property.  We  find  that 
the  basis  of  the  corporation  tax  is,  in  many  instances, 
the  capital  stock  at  its  par  value,  or  at  its  market 
value ;  and  in  a  good  many  instances,  the  bonded 
indebtedness  is  also  included.  When  the  nature 
of  the  business  is  such  that  the  capital  stock  and 
bonds  do  not  represent  all  the  capital  concentrated  in 
the  hands  of  the  corporation,  as,  for  example,  in  the 
case  of  banks  and  insurance  companies,  then  the 
business  transacted,  the  gross  earnings,  the  divi- 
dends, or  the  net  earnings  become  the  basis.  But 
no  clear  line  is  drawn  between  the  taxation  of  in- 
terest and  profits,  so  that  corporation  taxes  often 
approach,  in  character  and  operation,  business  taxes.2 

1  P.  422. 

2  The  best  discussion  of  this  interesting  field  of  taxation  is  con- 
tained in  Chapters  VI.,  VII.,  and  VIII.  of  Seligman's  Essays  on 
Taxation. 


CHAP,  vin  PROPERTY  TAXES  227 

SEC.  6.  There  remains  but  one  other  very  im- 
portant property  tax  and  that  is  the  inheritance  tax, 
or  the  successions  tax,  sometimes  called  -.  . 

Origin  of  the 

death  duties.1     The  feudal  "relief"  and  inheritance 
"  heriot "  were  payments  made  from  the  tax' 
estate  of  a  dead  vassal,  or  by  his  heirs,  in  recog- 
nition of  the   lord's   authority.     Similar   payments 
were  made  upon  the  transfer  of  property.     But  the 
direct  connection  between  these  feudal  dues  and  the 
modern  inheritance  taxes  is  hard  to  trace.      It  is 
probable  that  the  older  dues  suggested  the  feasibil- 
ity of  the  modern  inheritance  tax.     But  no  closer 
connection   than   that   has   been   established.      The 
modern  inheritance  tax  is  a  special  exercise  of  the 
taxing  power.     It  is  resorted  to  on  account  of  the 
comparative  ease  with  which  large  returns  can  be 
obtained   at   relatively  little   expense   and   without 
great  friction.     It  is  generally  justified  in  one  of 
two  ways  :    (1)  It  is  claimed  that  the  Justification 
deceased  person  has  probably  not  paid  of  the  inheri- 
his  share  of  the  general  taxes  during  his  * 
lifetime,  and  that  the  publicity  necessarily  connected 
with  the  transfer  of  his  property  to  his  heirs  affords 
an  excellent  opportunity  for  the  fiscus  to  "  get  even  " 
with   him.      If   this  were  the   sole   justification,  it 
would  require  that  the  exact  history  of  every  estate 
should  be  investigated,  and  only  those  subjected  to 

1  See  Max  West,  "The  Inheritance  Tax,"  Columbia  College 
Studies,  IV.,  2;  also  the  excellent  chapters  m  Bastable,  2d  ed., 
and  Seligman,  Essays,  pp.  307  ff. 


228         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

the  tax  that  could  be  shown  to  have  escaped  taxa- 
tion. But  this  would  be  a  laborious  and  costly 
process.  Another  justification  is,  therefore,  sought. 
(2)  It  is  claimed  that  in  all  cases  of  collateral  in- 
heritance, the  newly  acquired  wealth  comes  to  the 
heir  as  a  fortuitous,  more  or  less  unexpected  gain. 
He  had  been  living  without  it,  and  this  sudden 
increment  of  wealth  represents,  temporarily  at  least, 
a  sudden  increase  in  his  ability  to  pay  taxes.  This 
justification  points  to  the  necessity  of  exempting 
the  inheritance  by  immediate  dependents  of  the  de- 
ceased. They  were  already  living  upon  that  prop- 
erty; and  the  death  and  breaking  up  of  the  family 
and  of  the  estate  represent  to  them  not  an  increased, 
but  a  decreased,  tax  faculty. 

An  examination  of  the  many  forms  of  inheritance 
taxes  reveals  two  main  tendencies.  The  first  is  to 
Tendencies  of  exemP^  small  estates  and  to  establish  a 
modern  inker-  progressive  rate  for  larger  ones.  The 
itance  taxes.  gecond  is  to  exempt  that  portion  of  the 
estate  passing  to  the  immediate  heirs.  The  grounds 
for  this  second  exemption  have  already  been  exam- 
ined. The  grounds  for  the  first  are  wrapped  up  in 
the  general  principles  of  a  proportional  or  progres- 
sive rate.  A  very  good  example  of  these  principles 
is  afforded  by  the  new  English  death  duties  of  1894, 
and  the  older  "Legacy  and  Succession  Duties"  of 
1881,  which,  however,  are  not  progressive  as  to 
amount  of  property.  Under  the  new  law  the  estate 
of  every  person  dying  after  the  1st  of  August,  1894, 


CHAP,  vin  PROPERTY  TAXES  229 

must  pay  a  duty  which  varies  according  to  the  fol- 
lowing schedule  : 


£ 

£ 

£.  s 

Estates  from 

100  to 

500  pay 

1    Oper 

hundred. 

H 

500  " 

1,000    " 

2    0 

" 

" 

1,000  « 

10,000    « 

3    0 

" 

« 

10,000  " 

25,000    " 

4    0 

« 

M 

25,000  « 

50,000    " 

410 

H 

M 

50,000  « 

75,000    " 

5    0 

H 

« 

75,000  " 

100,000    « 

510 

H 

M 

100,000  " 

150,000    " 

6    0 

II 

M 

150,000  « 

250,000    « 

610 

M 

« 

250,000  « 

500,000    " 

7    0 

U 

M 

500,000  " 

1,000,000    " 

710 

« 

" 

1,000,000 

8    0 

« 

The  older  legacy  and  succession  duties  are  also  pro- 
gressive, but  in  a  different  way,  rising  as  the  degree 
of  relationship  of  the  recipient  of  the  legacy  becomes 
more  and  more  remote  from  the  deceased,  from  <£! 
in  a  hundred  to  <£10  in  a  hundred.  Thus  the  total 
burden  that  may  fall  upon  the  share  of  any  one 
person  can  amount  to  18  per  cent ;  i.e.  £10  in 
£100  of  the  duties  of  1881,  and  £8  in  £100  of 
those  of  1894. 

In  the  United  States,  inheritance  taxes  are  now 
in  use  in  thirteen  commonwealths.     In  all  but  one 
of  these,  New  York,  direct  inheritance  American 
is  untaxed,  and  there  only  personal  prop-  inheritance 
erty  so  inherited  is  taxed.     The  list  of  * 
exempted  relatives  varies  somewhat  from  common- 
wealth to  commonwealth.     The  taxes   are  not  pro- 


230         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

gressive.  In  all  but  Tennessee  a  certain  portion  of 
the  estate  is  exempt.  Probate  fees  and  taxes  are 
very  common,  existing  in  most  of  the  States.  They 
are,  however,  not  in  proportion  to  property  except 
in  Pennsylvania,  Vermont,  and  Virginia. 


CHAP,  ix  PERSONAL    TAXES  231 


CHAPTER  IX 

PERSONAL  TAXES 

SECTION  1.  The  simplest  form  of  personal  taxa- 
tion is  the  collection  of  an  equal  contribution  from 
each  citizen.  But  such  a  tax  cannot  be 

The  poll  tax. 

large,  else  it  would  impose  a  burden  be- 
yond the  ability  of  the  poor.  A  poll  tax  by  itself 
cannot  yield  sufficient  revenue  to  support  the  gov- 
ernment. The  uniform  per  capita  tax  is  not  just 
unless  .all  wealth  is  equally  distributed,  and  only 
in  a  very  .primitive  community  is  such  equality 
found.  He'nce  it  is  that,  outside  of  the  United 
States,  the  poll  tax  now  arouses  nothing  more  than 
an  historic  interest.  In  the  United  States  there  are 
about  thirty  commonwealths  that  still  have  the  poll 
tax.  It  is  levied  on  alL  males  between  the  ages  of 
20  or  21  years  and  45  or  60.  It  is  very  laxly  and 
poorly  collected  in  almost  all  cases,  being  in  general 
successfully  evaded  by  all  who  have  no  other  tax  to 
pay.  In  four  cases  it  takes  the  form  of  a  fee  for  the 
registration  of  voters.  In  the  early  taxes  of  the 
commonwealths  of.  the  United  States  there  was  fre- 
quently an  assessment  of  each  person  at  so  much  per 
poll  as  a  part  of  the  general  property  tax.  In  some 
commonwealths  the  poll  tax  still  exists  in  this  form. 


232         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

In  a  few  cases  this  contribution  is  used  for  local  pur- 
poses ;  thus,  in  some  commonwealths  there  is  a  road 
tax  of  so  much  per  capita  assessed  upon  those  indi- 
viduals who  are  found  by  the  authorities  on  the 
road.  The  road  tax  is  generally  payable  either  in 
labour  or  in  money. 

The  returns  from  the  poll  tax  are  generally  insig- 
nificant. Despite  the  apparent  ease  of  assessment  the 
poll  tax  is  expensive  to  collect.  It  frequently  causes 
much  opposition  and  friction.  It  militates  against 
the  demands  of  equality,  and  has  been  superseded 
by  other  forms  of  personal  taxation,  which  recog- 
nise differences  in  faculty. 

SEC.  2.  We  have  already  seen  how  the  poll  tax  in 
one  instance  developed  into  the  income  tax.  That 

The  theor    of     *aX   W^    n°W   ^e    Studied    mOre    closely. 

the  income  While  it  is  true  that,  since  the  abolition 
of  the  federal  tax,  the  income  tax  has 
little  more  than  a  theoretical  interest  for  American 
readers,  yet  inasmuch  as  the  hopes  of  reformers  all 
centre  in  it,  and  inasmuch  as  it  may  any  day, 
again,  become  a  live  question,  it  is  well  to  give  the 
theory  of  the  tax  some  consideration  here.  While 
the  general,  or  special,  property  taxes  rest  either 
on  the  benefit  theory  or  on  the  faculty  theory  of 
taxation,  income  taxes  are  better  defended  from  the 
standpoint  of  the  faculty  theory.  It  is  easier  to 
make  it  clear  that  income  measures  faculty,  than 
it  is  to  show  how  income  can  measure  benefit.  To 
be  sure,  it  has  been  claimed  with  some  plausibility 


CHAP,  ix  PERSONAL   TAXES  233 

that  income  is  a  sure  indication  of  the  benefit  en- 
joyed under  the  government.  But  that  proposition 
requires  more  argument  and  explanation  than  does 
the  simple  statement  that  a  citizen  is  able  to  pay 
more  or  less  because  he  has  a  greater  or  a  smaller 
income. 

Besides  this'  advantage  of  easier  justification,  the 
income  tax  has  in  common  with  all  personal  taxes 
another  recommendation.  It  levies  directly  on  the 
tax-payer.  The  nation's  income  from  taxation  is 
derivative.  As  such  it  is  abstracted  from  the  an- 
nual increment  of  wealth  of  the  citizens.  Any  taxa-' 
tion  which  is  actually  paid  out  of  capital  or  property 
is  ruinous.  Property  taxes  as  we  have  seen  are, 
theoretically,  paid  from  the  revenue  earned  by  the 
property  or  out  of  other  income  of  the  owner,  the 
property  being  at  best  but  the  indication  of  faculty 
or  of  benefit.  But  the  income  tax  finds  the  indica- 
tion of  faculty  in  the  source  of  the  tax.  There  is  a 
certain  directness  about  this  identification  of  base 
and  source  which  theoretically,  at  least,  is  a  strong 
recommendation  of  this  form  of  tax. 

From  the  standpoint  of  the  faculty  theory  no 
general  property  tax,  and  no  system  of  special  prop- 
erty taxes  which  has  not,  incorporated  in  it,  a  tax  on 
wages,  salaries,  profits,  and  the  like,  can  be  called 
equal.  Many  persons  enjoying  comparatively  little 
property  live  in  luxury  and  ease  from  their  personal 
gains,  while  many  others  possessing  comparatively 
large  property  may  be  from  time  to  time  in  serious 


234         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

straits.  For  example,  to  be  "land  poor"  is  to  be 
poor  indeed.  Large  property  does  not  always  imply 
ability  to  pay  taxes,  and  the  absence  of  property 
does  not  always  imply  absence  of  ability. 

There  has  been  a  feeling  in  the  United  States,  not 
always  clearly  expressed,  yet  strong  enough  to  influ- 
ence legislation,  that  the  earnings  of  personal  exer- 
tion, professional  fees,  and  the  like  are  not  good 
subjects  for  taxation.  This  is  the  result  of  an  ex- 
treme laissez-faire  view,  which  decries  every  sort 
of  interference  with  individual  freedom.  Every  tax 
is  seen  or  felt  to  have  a  repressive  tendency,  which 
is  sometimes  supposed  to  be  one  of  the  main  objects 
in  assessing  taxes.1  It  is  feared,  then,  that  to  tax  the 
earnings  of  men  would  discourage  exertion,  would 
discourage  industry.  That  this  is  a  mistaken  view 
of  the  nature  of  taxation,  will,  in  the  light  of  our 
whole  discussion,  be  evident  from  the  mere  state- 
ment. A  general  tax  on  all  income  would  not 
discourage  income  getting,  but  might  even  act  as  a 
stimulus  thereto,  more  income  being  required  to 
meet  the  tax  and  the  same  expenses  as  before.  It 
may  be  true  that  this  form  of  income  represents  less 
faculty  than  income  from  property,  because  more 
precarious  than  the  latter,  which  furthermore  leaves 
the  owner  free  to  engage  in  the  getting  of  other  in- 

1  A  liquor  license  in  a  certain  western  town  cost  $100.  A  tax 
of  $100  was  put  upon  banks.  The  bankers  held  up  their  hands  in 
horror:  "The  people  think  the  banks  are  as  undesirable  as  the 
saloons  1 " 


CHAP,  ix  PERSONAL   TAXES  235 

come.     But  the  entire  exemption  of  personal  earn- 
ings cannot  be  justified. 

SEC.  3.  The  form  of  the  income  tax  will  be  deter- 
mined by  the  place  given  it  in  the  system  of  taxa- 
tion. If  it  were  possible  to  administer  The  lace  . 
a  single  tax  of  any  sort  in  accord  with  the  tax  in  the 
the  demands  of  justice,  the  income  tax  system- 
would  be,  theoretically,  the  one  to  be  chosen.  But 
the  objections  to  any  single  tax,  already  stated,  bear 
upon  this  as  well  as  upon  any  other.  Theoretically, 
it  is  best  to  make  the  income  tax  the  central  one  of  the 
system,  the  gaps  of  which  are  filled  in  by  other  taxes. 
If  this  be  the  intention,  then  the  income  tax  can  be 
arranged  in  the  form  in  which  it  is  most  easy  to 
administer.  Thus  the  very  small  incomes  can  be 
exempt  from  the  income  tax,  being  covered  by  direct 
and  indirect  consumption  taxes.  In  this  way  one 
source  of  difficulty  and  friction  is  avoided.  Then 
no  distinction  need  be  made  in  the  assessment  of 
income  from  different  sources.  For  if  it  be  decided 
to  tax  income  from  funded  investments  at  a  higher 
rate  than  other  forms  of  income,  this  additional  tax 
can  be  laid  on  in  the  form  of  a  property  tax.  How 
far  the  exemption  of  smaller  incomes  should  go,  or 
to  what  extent  funded  incomes  should  be  more 
heavily  burdened,  depends  upon  the  concrete  facts 
in  each  case.  An  abatement  of  the  burden  in  cases 
where  there  are  already  more  than  the  usual  claims 
on  the  income,  as  of  a  large  family,  is,  also,  some- 
times given. 


236         INTRODUCTION  TO  PUBLIC  FINANCE      PART  il 

SEC.  4.  As  an  example  of  such  a  tax,  not,  per- 
haps, ideally  perfect,  but  still  laid  down  in  accord 
Prussian  in-  with  the  general  principles  enunciated 
come  tax.  above,  we  will  study  somewhat  in  detail 
the  Prussian  income  tax.1  In  order  to  have  in  mind 
the  main  features  of  the  development  already  out- 
lined above,  Chapter  V.,  we  quote  from  Mr.  Hill 
the  successive  stages  in  the  growth  of  personal  taxa- 
tion in  Prussia : 

"  1.    A  uniform  poll  tax,  1811. 

"  2.  A  class  tax,  collecting  somewhat  more  from 
the  prosperous,  and  not  less  from  the  poor,  1820— 
1821. 

"  3.  To  supplement  the  class  tax,  an  income  tax 
with  comparatively  few  classes,  a  uniform  rate,  and 
a  maximum  limit,  1851. 

"  4.  Classification  made  finer,  the  maximum  limit 
removed,  and  the  class  tax  below  made  practically 
an  income  tax  with  a  progressive  rate,  and  tho 
exemption  of  incomes  up  to  420  M.,  1873. 

"5.  Exemption  of  incomes  up  to  900  M.,  reduc- 
tion of  the  remaining  rates  of  the  class  tax,  and  of 
the  two  lowest  rates  of  the  income  tax,  1881-1883. 

"  6.  Principle  of  progression  extended  to  all 
incomes  under  100,000  M.,  incomes  under  10,000  M. 
taxed  less  than  before,  and  higher  incomes  more  ;  a 

1  For  history  see  Hill,  Quarterly  Journal  of  Economics,  VI.,  207  ; 
Wagner,  "  Die  Reform  der  directen  Staatsbesteuerung  in  Preussen 
im  Jahre  1891,"  Schanz'  Finanz  Archiv.,  VIII.  Jahrgang,  II.  Band. 
A  full  statement  of  the  law  is  there  appended. 


CHAP.  IX 


PERSONAL  TAXES 


237 


declaration   of   income   by  the   tax-payer   required, 
and  a  finer  classification  adopted,   1891." 

To  make  the  new  tax  still   more  clear  we  quote 
the  rates  from  the  law  itself : 


TARIFF    OF   RATES. 


Incomes. 

Rate. 

from 

to  (inclusive) 

M. 

M. 

M. 

900 

1,050 

6 

1,050 

1,200 

9 

1,200 

1,350 

12 

1,350 

1,500 

16 

1,500 

1,650 

21 

1,650 

1,800 

26 

1,800 

2,100 

31 

2,100 

2,400 

36 

2,400 

2,700 

44 

2,700 

3,000 

52 

3,000 

3,300 

60 

3,300 

3,600 

70 

3,600 

3,900 

80 

3,900 

4,200 

92 

4,200 

4,500 

104 

4,500 

5,000 

118 

5,000 

5,500 

132 

5,500 

6,000 

146 

6,000 

6,500 

160 

6,500 

7,000 

176 

7,000 

7,500 

192 

7,500 

8,000 

212 

8,000 

8,500 

232 

8,500 

9,000 

252 

9,000 

9,500 

276 

9,500 

10,500 

300 

The  rate  increases 

from 

to                    in  stages  of 

by 

M. 

M.                           M. 

M. 

10,500 

30,500                1,000 

30 

30,500 

32,000                1,500 

60 

32,000 

78,000               2,000 

80 

78,000 

100,000               2,000 

100 

238         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

In  the  case  of  incomes  from  100,000  M.  to  105,000  M. 
the  tax  is  4000  M.  And  from  that  point  on  the  pro- 
portional rate  of  4  per  cent  is  assessed  upon  the  lower 
limits  of  stages  of  5000  M.  each. 

This  rate  is  progressive  from  about  two  thirds  of 
one  per  cent  at  900  M.  to  3  per  cent  at  10,000  M. 
Then  the  rate  is  nearly  proportional  at  3  per  cent 
up  to  30,000  M.  Then  progressive  again,  until 
at  100,000  M.  4  per  cent  is  reached,  after  which  it 
is  proportional  again.  Each  tax-payer  having  an 
income  of  over  3000  M.  is  required  to  "  declare  "  it. 
He  has  to  fill  out  a  blank  calling  for  a  statement 
of  income  from  each  of  four  sources  :  (1)  from 
capital  invested,  interest  and  dividends;  (2)  from 
landed  property  and  houses,  including  all  crops, 
„,  f  .  whether  consumed  in  the  house  or  not, 

1  ne  form  of 

the  dedara-  but  deducting  the  cost  of  cultivation ; 
twn'  (3)  from  trade,  industry,  or  mining,  de- 

ducting the  cost  of  maintenance ;  (4)  from  any  em- 
ployment, wages,  salaries,  fees,  and  including  pen- 
sions and  every  source  of  income  not  covered  by  (1) 
(2)  and  (3).  Deductions  are  allowed  (1)  for  interest 
on  debts,  except  that  on  business  debts ;  (2)  for 
permanent  legal  burdens  (example,  maintenance  of 
reserves),  (3)  contributions  to  sick  funds ;  (4)  life- 
insurance  premiums.  This  division  of  the  income 
into  different  parts  is  for  the  sake  of  accuracy  of 
declaration,  not  for  the  sake  of  assessing  different 
rates  on  the  different  kinds  of  income. 

Persons  with  large  dependent  families  or  labour- 


CHAP,  ix  PERSONAL   TAXES  239 

ing  under  any  special  economic  conditions  seriously 
affecting   their   faculty   are   allowed   an  Abatements 
abatement  of  not  more  than  three  grades  a#°wed. 
provided  their  incomes  are  not  over  9500  M.     Persons 
having  less  than  3000  M.  deduct  50  M.  for  each  child 
under  fourteen  years  of  age,  and  if  there  are  three 
such  children  a  reduction  of  one  grade  is  made. 

Corporations  and  stock  companies  pay  the  income 
tax  on  all  dividends  over  3J  per  cent.  This  makes 
double  taxation  of  this  income,  which  is  regarded 
as  particularly  "capable."  In  other  ways  the 
attempt  is  made  to  tax  funded  income  more 
heavily.  The  exemption  of  incomes  below  900  M. 
($225)  and  the  lower  rate  for  smaller  incomes  is 
justified  on  the  ground  that  the  consumption  taxes 
already  impose  a  burden  on  these  persons. 

The  assessment  of  the  tax  is  not  perfect.  It  is 
said  to  be  considerably  better,  however,  than  the 
assessment  of  property  in  America.  Large  incomes 
escape  in  part.  It  has,  however,  an  advantage  in 
that  the  evasion  of  the  tax  does  not  in  Prussia  as  it 
does  in  America  intensify  existing  differences  and 
inequalities.  Other  parts  of  the  system  tend  to 
offset  the  failure  in  this  case. 

SEC.  5.  The  British  income  tax,  correctly  called 
"the  property  and  income  tax,"  may  The  property  i 
serve  as  another  illustration,  but  it  dif-  "ndinc°me 

tax  in  Eng- 

fers  very  much  from  the  Prussian.    Log-  land. 
ically,  this  tax  might  have  been  treated  in  the  pre- 
vious chapter,  but  it  is  as  well  to  discuss  it  here. 


240         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

In  the  first  place,  as  has  already  been  stated,  it  is 
rather  a  system  of  taxes  on  revenue  than  a  tax  on 
the  aggregate  income  of  each  person.  It  is  a  sys- 
tem of  modified  property  taxes,  with  a  wage  and 
salary  tax  appended.  In  Prussia  the  intention  is 
to  make  the  total  income  the  base  irrespective  of 
the  source,  and  reference  to  the  -sources  is  called 
for  in  the  declaration  merely  as  ajneans  of  getting 
at  the  total  with  greater  aciairacy.  In  England  the 
different  sources  are  kept  strictly  apart,  and  there  is 
a  difference  made  in  the  treatment  of  each  kind  of 
income  :  the  tax  being  in  some  cases  "  stopped  at 
the  source."  The  total  income  is  only  called  into 
use  in  estimating  the  exemptions  and  abatements. 
The  tax-payer  has  the  right  by  summing  up  his 
whole  income  to  show  that  he  has  been  taxed  too 
much,  or  is  entitled  to  exemption.  In  that  case  he 
is  reimbursed.  In  1895  such  abatements  amounted 
under  schedule  A  (see  below)  to  £ 800,000 ;  on  small 
incomes  the  amount  returned  was  ^£840,000.  So 
separate  are  the  different  parts  of  this  tax  that  Mr. 
Wilson  says  of  it  : l  "  To  the  bulk  of  the  people, 
it  is  known  in  its  most  obnoxious  (?)  form  as  a  tax 
upon  ordinary  incomes,  salaries,  professional  earn- 
ings, profits  of  trading,  etc."  Bastable  (p.  449) 
says  :  "  Inequalities  are,  however,  removed  by  the 
comprehensiveness  of  the  tax." 

The  various  revenues  are  taxed  in  five  "schedules," 
known  as  schedules  A  to  E. 

1  P.  115,  National  Budget. 


CHAP,  ix  PERSONAL    TAXES  241 

Under  schedule  A,  Great  Britain  taxes  the  rev-  , 
enues  received  from  property  by  owners  of  rented 
lands  or  houses  (tenements),  proceeds  from  tithes 
(not  commuted),  royalties,  etc.  Mortgages  are 
taxed  in  this  schedule,  owners  being  allowed  to 
deduct  what  they  advance  in  taxes  from  the  inter- 
est they  pay.  By  a  change  recently  made  in  the 
income  tax,  in  consideration  of  the  burden  of  the 
inheritance  tax,  revenue  assessed  in  schedule  A 
may  receive  an  abatement  of  one-eighth  in  the  case 
of  that  from  farms,  and  one-sixth  in  the  case  of 
that  from  buildings. 

Under  schedule  B  is  taxed  the  income  gained  by 
occupiers  of  land  (tenements  and  hereditaments)  ex- 
cept where  the  land  is  used  as  the  means  of  carry- 
ing on  some  trade  ;  as,  for  example,  nursery  gardens. 
Owners  in  occupation  pay  under  this  head. 

Under  Schedule  C  is  taxed  the  income  from  annu-   ' 
ities,  dividends,  etc.,  not  paid  from  the  public  funds. 
The  banks  are  required  to  deduct  the  amount  of  the 
tax  from  the  interest  paid. 

Under  schedule  D  are  taxed  salaries,  professional 
earnings,  profits  of  trading,  etc.  (railways,  canals, 
mines,  gas-works,  water- works,  etc.),  and  all  gains 
not  included  in  the  other  schedules.  Most  wage- 
earners  evade  the  tax,  or  are  exempt  on  account 
of  the  smallness  of  their  incomes. 

Schedule  E  includes  public  salaries  and  pensions    ' 
of  employees  of  the  State,  or  of  the  corporate  bodies. 
This  tax  is  stopped  at  the  source. 


242         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

Incomes  of  less  than  ,£400  are  assessed  at  £150 
less  than  they  really  are.  Between  .£400  and  £500 
at  .£100  less.  These  abatements  exempt  all  persons 
with  less  than  $750  annual  income  and  lessen  the 
burden  for  all  up  to  $2500.  It  is,  therefore,  a  tax 
on  large  incomes. 

This  tax  is  the  variable  element  in  the  English 
system,  the  rate  being  changed  from  time  to  time 
itspiaceinthe  according  to  the  estimated  requirements. 
system.  The  indirect  taxes,  the  excise  and  the 

customs  duties,  being  necessarily  of  fixed  rate,  yield  a 
steady  return,  which  grows  slowly.  And  any  varia- 
tion in  the  probable  expenditure  can  be  met  by  chang- 
ing the  rate  of  the  income  tax.  The  annual  yield 
is  now  about  £15,000,000,  or  about  one-sixth  of  the 
total  revenue  of  the  government.  A  rather  large 
change  in  the  rate  of  this  tax,  would,  therefore,  not 
.result  in  a  very  great  change  in  the  total  income. 

The  assessment  of  wages,  business  profits,  and  the 
like,  is  said  to  be  very  lax.  But  this  is  tolerable 
because  the  indirect  taxes,  which,  together,  are  more 
than  one-half  the  public  income,  may  be  said  to  fall 
on  that.  Life-insurance  premiums  may  be  deducted 
from  the  taxable  income. 

SEC.  6.     The  United  States  Federal  government 

has  made  two  attempts  to  establish  an  income  tax. 

The  first  was  a  war  measure,  and  was  re- 

Income  taxes 

in  the  United    pealed  as  soon  as  the  pressing  necessity 

was  removed.     The  second  was,  like  the 

English  income  tax  in  1842,  a  means  to  make  up  the 


CHAP,  ix  PERSONAL   TAXES  243 

estimated  deficit  resulting  from  the  repeal  of  the  pro- 
tective duties.  It  failed  to  go  into  effect,  however, 
as  the  Supreme  Court  could  not  be  convinced  of  its 
constitutionality. 

We  shall  consider  the  civil  war  tax  first.1  The 
constitution  provides : 

"  No  Capitation,  or  other  direct,  Tax  shall  be  laid, 
unless  in  Proportion  to  the  Census  or  Enumeration 
hereinbefore  directed  to  be  taken."  Article  L,  sec.  9. 

Also,  "  Representatives  and  direct  Taxes  shall  be 
apportioned  among  the  several  States  .which  may  be 
included  within  this  Union,  according  to  their  re- 
spective Numbers,  which  shall  be  determined  by 
adding  to  the  whole  Number  of  free  Persons,  includ- 
ing those  bound  to  Service  for  a  Term  of  Years,  and 
excluding  Indians  not  taxed,  three-fifths  of  all  other 
Persons."  Article  I.,  sec.  2. 

And,  "  .  .  .all  Duties,  Imposts,  and  Excises  shall 
be  uniform  throughout  the  United  States."  Article 
L,  sec.  8. 

Early  in  the  search  for  revenues  to  support  the  war 
a  proposition  was  made  for  the  apportionment  of  a 
tax  of   $30,000,000   in   accordance  with  these  pro- 
visions.    But  it  was  felt  that  population   77^  civii  war 
was  no  measure  of  the  wealth  of  the  dif-  income  tax. 
ferent  States,  and  that  such  an  apportionment  in  1861 
would  not  result,  as  one  in  1789  might  have  done,  in 
imposing  fairly  equal  burdens  upon  all  the  citizens. 
In  lieu  thereof,  an  income  tax  of  3  per  cent  on  all 
1  See  Quarterly  Journal  of  Economics,  VIII.,  4;  also  July,  1889. 


244         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

incomes  with  an  exemption  of  $800  was  voted.  In 
the  case  of  Springer  v.  the  United  States,  102  U.  S. 
586,  the  Supreme  Court  decided  that  such  a  tax 
could  be  levied  since  it  was  not  a  direct  tax  within 
the  meaning  of  the  constitution. 

The  tax  was  to  go  into  force  a  year  later.  But  in 
1862  it  was  amended,  making  the  deduction  $600 
and  the  rate  progressive.  Incomes  from  $600-$10,000 
(less  $600)  paid  3  per  cent,  all  over  that  5  per  cent. 
In  that  form  it  went  into  effect.  The  great  war  tax 
law  of  June  30,1864,  made  the  rates  as  follows:  5 
per  cent  on  the  excess  over  $600  up  to  $5,000;  7|  per 
cent  on  the  excess  over  $5,000  up  to  $10,000;  and 
10  per  cent  on  the  excess  over  $10,000.  But  again, 
before  the  law  went  into  effect,  the  1\  per  cent  rate 
was  cut  out  and  10  per  cent  was  collected  from  all 
incomes  over  $5,000.  On  all  incomes  derivable  from 
the  public  funds l  the  tax  was  stopped  at  the  source. 
In  1867  the  tax  was  reduced  and  the  rate  made  5  per 
cent  with  an  exemption  of  $1000,  and  it  remained 
thus  until  1870.  The  income  tax  was,  in  a  way,  con- 
joined with  one  on  corporations,  banks,  insurance 
companies,  railroads,  etc.  The  part  of  the  indi- 
vidual's income  taxed  in  this  latter  way  was  deducted 
before  the  income  was  assessed.  No  attempt,  how- 
ever, was  made  to  make  the  rate  of  this  tax  progres- 
sive. It  was  first  3  per  cent  and  later  5  per  cent,  and 
there  were  no  exemptions.  The  assessment  was  made 
on  the  basis  of  a  written  declaration  by  the  tax-payer, 

1  Except  interest  on  bonds. 


CHAP,  ix  PERSONAL   TAXES  245 

subject  to  correction  by  such  information  as  the 
assessor  could  gather.  Generally  the  information 
upon  which  the  tax  was  assessed  was  published  in 
the  newspapers.  With  the  general  removal  of  war 
taxes  in  1870  the  income  tax  fell  away.  The  pro- 
tective policy,  which  demanded  the  retention  of  the 
customs  duties,  rendered  it  possible  to  do  without 
the  revenue  from  this  source. 

The  reduction  of  the  customs  duties  in  1894,  and 
the  probability  of  a  falling  off  in  the  revenues  from 
this  source  led  to  the  second  income  tax.1  77^  income 
The  law  for  this  tax,  faultily  drawn  and  tax  of  1394. 
more  or  less  incorrect  in  principle,  was  declared  un- 
constitutional by  the  Supreme  Court  in  1895  before 
it  went  into  effect.  The  grounds  for  this  decision, 
which  reversed  that  in  the  case  of  Springer  v.  the 
United  States,  by  which  the  other  tax  law  had  been 
tested,  were  that  the  tax  was  a  direct  tax  and  also 
not  uniform  inasmuch  as  all  incomes  below  $4000 
were  exempt.  This  astonishing  decision  bespeaks 
more  acquaintance  on  the  part  of  the  Court  with 
economic  literature  than  with  the  use  of  language  at 
the  time  of  the  adoption  of  the  constitution.  As  the 
decision  now  stands  no  income  tax  can  be  levied  by 
the  federal  government  without  a  constitutional 
amendment. 

This  income  tax  was  to  be  for  five  years,  commenc- 
ing 1895.     It  was  degressive,  at  2  per  cent,  on  all 
incomes  in  excess   of  $4000.     It  was  levied  upon 
1  Quarterly  Journal  of  Economics,  IX.,  1.' 


246         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

"the  gains,  profits,  and  income"  of  all  citizens  and 
residents,  "  derived  from  any  kind  of  property,  rents, 
interest,  dividends,  or  salaries,  or  from  any  profes- 
sion, trade,  employment,  or  vocation,"  "  or  from  any 
other  source  whatever."  Debts,  and  interest  thereon, 
were  exempt.  The  cost  of  stocking  the  farm  and 
home  consumption  of  products  were  not  included. 
Accretions  by  gift  or  inheritance  were  to  be  counted 
as  income.  All  persons  having  an  income  of  over 
$3500  were  required  to  declare  their  incomes.  The 
individual  stockholder  in  a  corporation  was  allowed 
to  deduct  the  income  from  his  shares  in  making  his 
return.  Public  corporations  were  exempt,  but  other 
corporations  were  not.  State  and  local  taxes  except 
special  assessments  might  be  deducted.  United 
States  officials  were  taxed  on  their  salaries.  Returns 
were  to  be  confidential. 

It  will  easily  be  seen  that  this  was  a  combina- 
tion of  an  income  tax  with  an  inheritance  and 
corporation  tax.  That  it  would  necessarily  have 
worked  badly  on  that  account  is  not  clear.  The 
rate  was  so  low  and  the  exemptions  so  liberal  that 
pretty  full  returns  might  have  been  justly  antici- 
pated. The  law,  however,  was  loosely  drawn,  faulty 
in  wording,  and  even  contained  clauses  taken  from 
the  laws  of  the  civil  war  tax  having  no  possible 
meaning  or  bearing  in  the  connection  in  which  they 
were  used.  No  attempt  was  made  to  adjust  the  tax 
to  the  existing  burden  of  State  and  local  taxes. 

The  taxation  of  income  by  the  commonwealths  of 


CHAP,  ix  PERSONAL   TAXES  247 

the  United  States  is  rare  and  entirely  without  lead- 
ing principles.  In  Virginia  alone  there  is  a  general 
income  tax.  It  is  supposed  to  be  a  tax  of  10  per 
cent  on  all  incomes  over  $1000.  But  the  returns 
obtained  in  this  commonwealth  are  insignificant  be- 
cause of  the  lax  assessment.  Partial  income  taxes,  in- 
tended to  supplement  the  personal  property  taxes  and 
to  cover  the  annual  saving,  exist  in  Massachusetts, 
Pennsylvania,  Tennessee,  and  North  Carolina.1 

1  See    Seligman,    "Finance    Statistics,"   Publications  of  The 
American  Statistical  Association,  New  Series,  8,  December,  1889. 


248          INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 


CHAPTER  X 

THE  INCIDENCE   OF   TAXATION 

SECTION  1.  We  postponed  a  treatment  of  the 
question  of  incidence  in  connection  with  each  tax, 
Incidence  de  ^ecause  "^ne  incidence  of  any  tax  depends 
pends  upon  upon  its  place  in  the  system.  It  seems, 
the  system.  therefore?  better  to  treat  the  subject  by 
itself  in  such  a  way  that  every  tax  can  be  considered 
in  its  connection  with  other  taxes.  The  problems 
of  this  part  of  the  subject  are  many  and  difficult. 
In  an  elementary  treatise,  all  that  can  be  done  is  to 
suggest  methods  of  study  and  a  very  few  of  the 
more  simple  principles. 

By  the  term  "  shifting  "  is  meant  the  transference 
of  the  burden  of  a  tax  from  the  payer  to  some 
The  meaning  other  person  or  persons.  By  the  "  final 
anf^inci-  incidence "  is  meant  the  falling  of  the 
dence.  burden,  without  possibility  of  further 

shifting,  upon  some  particular  revenue,  property, 
expenditure,  or  person.  This  may  be  illustrated  by 
two  very  simple  cases.  An  American  bookseller  in  a 
college  town  imported  some  books  from  England  for 
the  use  of  the  students.  He  paid  the  duty  to  the 
custom  house,  but  collected  it  again  from  the  stu- 
dents in  the  shape  of  an  addition  to  the  price  of  the 


CHAP,  x  INCIDENCE  OF  TAXATION  249 

books.  The  bookseller  shifted  the  tax.  The  final 
incidence  was  on  the  students.  In  this  case,  the  shift- 
ing was  expected  by  the  law-maker.  It  was  to  save 
the  expense  of  hunting  up  and  taxing  each  user  of 
the  books  in  question,  that  the  seller  was  made  to 
pay  the  tax,  or  to  be  the  agent  of  the  government  in 
collecting  it.  Since  the  students  thus  taxed  cannot 
shift  the  burden,  we  need  not  investigate  this  case 
further.  'Again:  in  California,  the  commonwealth 
and  local  taxes  paid  by  the  mortgagee  amount  on 
the  average  to  about  If  per  cent.  The  current 
rate  of  interest  on  the  best  untaxed  loans,  in 
and  around  San  Francisco,  is  about  6  per  cent, 
but  on  mortgages,  in  spite  of  the  good  security, 
it  has  been  almost  invariably  8  per  cent,  or 
more.  In  this  case,  the  mortgagee  shifts  the 
tax,  and  its  incidence  is  on  the  mortgagor.  This 
may  be  its  final  incidence,  or  it  may  be  possible  for 
the  mortgagor  to  shift  the  burden  to  the  tenant  of 
the  mortgaged  property  in  the  shape  of  higher  rents, 
or  to  the  purchasers  of  the  commodities  raised  on 
the  property  in  higher  prices.  This  last  illustration 
shows  how  complicated  the  problem  of  incidence 
may  be. 

SEC.  2.  Each  and  every  tax  must  be  studied  in 
its  proper  connection  if  it  is  desired  to  know  to 
what  extent  the  aims  of  taxation  are  Shifting  may 
realised.  Sometimes  the  shifting  of  the  """y™*** 

feat  the  pur- 

tax  defeats  the  general  purpose,  as  in  pose  of  the  tax. 
the  case  of  the  tax  on  the  mortgagee's  interest  in 


250         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

California,  while  in  others  the  general  purpose  can 
only  be  accomplished  when  the  tax  is  shifted.  The 
process  of  shifting,  like  every  other  economic  trans- 
fer of  burdens,  costs  something.  No  person  ad- 
vances the  amount  of  the  tax  with  the  intention  of 
transferring  it  to  some  other  without  desiring  to  be 
paid  for  his  trouble  and  risk.  Unless  the  conditions 
are  against  him  he  will  succeed  in  getting  paid  for 
it.  Thus,  the  importer  of  books  tries  to  get  a 
certain  profit  on  the  cost  to  him,  which  is  composed 
of  the  price  in  England  plus  the  cost  of  transporta- 
tion and  the  duty.  If  the  rate  of  profit  or  commis- 
sion which  he  reckons  is  10  per  cent,  he  adds  10 
per  cent  of  the  duty  as  well  as  of  the  other 
items.  The  money  which  he  has  advanced  on  the 
duty  must  bring  him  its  share  of  the  earnings.  So 
in  the  case  of  the  mortgages  in  California.  One- 
quarter  of  one  per  cent  interest,  or  more,  is  usually 
charged  above  the  rate  plus  the  tax.  If  the  lender 
has  to  suffer  the  annoyance  and  run  the  risk  of 
paying  the  tax,  he  will  have  to  be  reimbursed. 
Shifting  is  a  Shifting  is,  therefore,  an  undesirable  and 
costly  process,  costly  process,  and  is  to  be  avoided  un- 
less there  is  some  clear  saving,  as  in  the  case  of 
the  customs  duties. 

SEC.  3.    The  aims  of  taxation,  the  accomplishment 

of  which  shifting  may  aid  or  defeat,  have  been  stated 

in  the  form  of  canons.     The  oldest  and.  most  famous 

are  the  four  of  Adam  Smith.1     The  fourth  of  these 

1  Wealth  of  Nations,  Bk.  V.,  Chapter  II.,  Part  IL 


CHAP.X  INCIDENCE  OF  TAXATION  251 

famous  canons  bears  directly  upon  the  problem  in 
hand.  Shifting  adds  to  the  burden  without  adding 
to  the  revenue  coming  into  the  treas-  Sometimes  a 
ury.  Sometimes,  however,  by  assessing 
the  tax  upon  a  part  of  a  great  economic  five. 
process  and  permitting  of  a  certain  shifting,  the  tax 
is  made  more  productive  to  the  treasury.  Now  it 
is  clear  that  the  first  duty  of  the  fiscal  officer  is  to 
fill  the  treasury  as  quickly  and  easily  as  possible. 
He  has,  therefore,  no  right  to  pass  over  a  tax  that 
is  productive,  in  favour  of  one  that  is  not,  simply 
because  the  one  is  shifted  and  the  other  is  not.  If, 
however,  it  can  be  seen  that  the  incidence  is  such  as 
to  entirely  derange  the  system  adopted  and  defeat 
the  general  aims,  an  attempt  must  be  made  to  pre- 
vent it.  If  a  tax  can  be  found  that  is  productive 
and  at  the  same  time  is  not  shifted,  it  will  be  pre- 
ferred to  one  that  is  shifted. 

It  follows  directly  from  the  fact  that  a  tax  should 
be  as  "productive"  as  possible,  that  those  taxes 
chosen  should  have  as  little  repressive  effect  as 
possible.1  For,  to  destroy  the  phenomenon  is  to 
lose  the  return. 

SEC.  4.  Let  us  suppose  that  the  ideal  by  which 
all  systems  are  to  be  tested  is  that  the  total  taxation 
shall  impose  a  slightly  progressive  burden  upon  all 

1  See  Bastable,  pp.  388,  389,  for  the  same  idea ;  also  Ross,  "  A 
new  Canon  of  Taxation,"  Political  Science  Quarterly,  VII.  This 
is  no  very  new  canon.  Adam  Smith  said :  "  Taxation  should  re- 
tard as  little  as  possible  the  growth  of  wealth." 


252         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

incomes.  Then  it  is  necessary  to  examine  all  the 
taxes  with  their  various  shiftings  and  to  see  how 
the  total  shifting  affects  the  final  result.1  It  is  a 
fundamental  principle,  too  often  overlooked  in  the 
discussion  of  incidence,  and  one  that  cannot  be  too 
frequently  restated,  that  the  possibility  of  shifting 
Shifting  can-  depends  largely  upon  the  relation  of  the 

"when^hetax*    taX  in  <luestion  to  the   other  Parts  of   the 

is  universal,  system.  Let  us  use  an  old  illustration  : 
the  tax  on  mortgages  is  in  California  shifted  to  the 
mortgagor  because  there  are  other  investments  for 
capital  that  escape  taxation.  If  every  possible 
channel  into  which  capital  might  go  led  to  the  pay- 
ment of  a  similar  tax,  it  would  not  be  so  possible 
as  it  now  is  to  shift  this  tax.  It  is  not  quite  true 
that  the  tax  would  not  be  shifted  at  all,  but  it  cer- 
tainly could  not  be  so  universally  shifted.  We 
shall  see  later  when  it  may  be  shifted.  If  we  had 
a  tax  system  so  arranged  as  to  fall,  in  the  first  in- 
stance, upon  all  parts  of  each  individual's  income,  — 
an  unattainable  ideal,  —  there  could  be  but  little 
shifting.  But  when  a  part  of  the  nation's  wealth 
is  exempt,  taxes  upon  all  wealth  that  might  be  trans- 
ferred into  this  exempt  form  are  peculiarly  liable 
to  be  shifted. 

1  There  have  been  many  theories  which  have  undertaken  to 
explain  the  final  incidence  of  all  taxation  on  some  other  plan  than 
that  of  an  examination  of  all  the  different  taxes.  Professor  Selig- 
man  discusses  ten  different  classes  of  theories  in  regard  to  inci- 
dence of  which  only  two  require  this  method.  See  Shifting  and 
Incidence  of  Taxation. 


CHAP,  x  INCIDENCE  OF  TAXATION  253 

SEC.  5.    We  shall  now  look  at  the  incidence  of  the 
more  important  taxes,  taking  them  in  the  order  of 
our  previous  discussion.     Excise  taxes  and  customs 
duties,  so  far  as  the  latter  yield  a  revenue  Shifting  of 
and  fall   upon   citizens   of  the   country  "£*£, 
laying  them,1  are  for  our  present  purpose  duties. 
the  same.     They  are  classed  by  Professor  Seligman 
as  "virtually  one  form  of   the  profits  tax,"  which, 
"  in  the  great  majority  of  cases,"  will  be  "  shifted 
in  whole   or  in    greater   part."      What    Professor 
Seligman  says  upon  this  point 2  is  true  enough  and 
very  clear,  but  we  shall  follow  an  entirely  different 
analysis. 

In  the  case  of  these  taxes  it  is  the  intention  of 
the  law-maker  that  the  tax  shall  be  shifted  to  the 
consumer.  If  any  of  it  remains  on  the  producer  or 
importer,  it  may  be  said  to  have  been  shifted  back. 
This  takes  place  sometimes:  (1)  if  the  taxed  com- 
modity is  produced  as  a  monopoly,  and  the  price  is 
already  as  high  as  the  traffic  will  bear,  i.e.  the  addi- 
tion of  the  tax  to  the  price  would  lessen  the  sale, 
then  a  part  or  the  whole  of  the  tax  comes  out  of  the 
profits  of  the  monopolist;  (2)  a  new  tax  on  some 
commodity  produced  by  a  large  plant  of  fixed  capi- 
tal, not  easily  transferable  to  other  lines,  may  remain 
on  the  producer.  In  all  other  cases  an  excise  or  an 
import  tax  cannot  be  shifted  from  the  consumer. 

SEC.  6.    The   general   property  tax   consists  of  a 

1  See  Chapter  VII.  for  shifting  to  foreigners. 

2  See  pp.  140  ff.,  and  p.  177. 


254         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

number  of  different  parts  which  are  best  considered 
separately.  Such  a  separation  is  legitimate  since 

The  incidence    ^Q    ^aX    ^a^S    aPar^    ^n    *ne    Pr&ctice    of 

of  the  general  assessment.  It  falls  naturally  into  at 
property  tax.  jeag^.  ^wo  grea^  divisions,  a  tax  on  real 

estate  and  a  tax  on  personal  property.  The  tax  on 
real  estate  may  be  regarded  as  of  two  parts,  a  tax 
on  land  and  a  tax  on  buildings.  In  the  general 
property  tax,  the  tax  on  land  is  assessed  according 
to  the  selling  value.  When  the  land  is  used  for 
agricultural  purposes  the  incidence  of  the  tax  lies 
between  the  owner  and  the  user  of  the  commodities 
produced.1  Can  the  owner  shift  the  tax  to  the  con- 
sumer ?  If  this  happens,  it  means  a  rise  in  prices 
which  again  means  an  extension  of  the  margin  of 
cultivation,  marginal  lands  being  untaxed,  as  having 
no  price,  or  less  heavily  taxed.  But  such  a  rise  in 
price  may  affect  consumption  and  lessen  the  demand 
at  the  same  time  that  it  tempts  to  the  creation  of  a 
new  supply,  thus  inducing  a  fall  in  prices.  But  as 
cultivators  of  land  do  not  readily  withdraw  from  their 
position,  those  on  or  near  the  margin  of  cultivation 
will  suffer  severely,  but  will  generally  hold  on  until 
their  profits  are  gone,  often  until  they  are  ruined. 
The  conditions  under  which  agricultural  products 
are  sold  to-day  are  beyond  the  control  of  any  one 
set  of  producers.  The  full  burden  of  the  taxes 

1  For  America,  the  tenant  may  be  considered  as  a  consumer  of 
utilities,  residence,  etc. ;  so  few  farms,  or  productive  lands,  are 
rented  that  they  need  not  be  considered. 


CHAP,  x  INCIDENCE  OF  TAXATION  255 

upon  agricultural  land,  therefore,  falls  upon  the 
farmers.  In  the  United  States,  inasmuch  as  the 
farmers  are  seldom  the  owners  of  any  in  the  United 
considerable  amount  of  untaxed  personal  States  the 

farmers  are 

property,  they  bear  far  more  than  their  overtaxed. 
proportionate  share  of  the  commonwealth  taxes  and 
often  also  of  the  local  taxes. 

When  land  is  used  for  other  purposes  than  agri- 
culture, it  is  generally  best  considered  in  connection 
with  the  buildings  on  it.  The  incidence  Incidence  Of  a 
of  the  general  property  tax  on  houses  taxonbuiid- 
and  the  land  they  occupy  will  vary  from  mgs' 
locality  to  locality  with  the  demand  for  such  houses 
and  the  supply.  Houses  cannot  be  readily  torn  down 
or  fundamentally  altered  without  great  loss:  conse- 
quently if  the  supply  of  rentable  houses  is  larger 
than  the  demand,  the  tax  on  the  buildings  will  fall 
wholly  on  the  owner.  It  can  be  shifted  to  the  tenant 
only  when  the  supply  of  houses  is  very  limited.  In 
America  these  two  cases  are  both  frequently  illus- 
trated. 

The  incidence  of  that  part  of  the  general  prop- 
erty tax  which  is  assessed  upon  personal  property 
or  upon  invested  capital  is  very  difficult   The  incidence 
to  trace.     If  the  tax  were  well  and  uni-  on  personal 
versally  assessed  upon  all  such  capital,  Pr°Perty- 
it  could  not,  regularly,  be  shifted  from  the  owner 
at  all.     There  is  no  free  field   for  this  capital  to 
invade.      But  when  the   tax   is  evaded  by  a  con- 
siderable  proportion   of   the    capital,   then   the   tax 


256         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

can  be  shifted  to  the  borrower  and  will  be  so  in 
the  main.1 

It  will  be  seen  even  from  this  brief  statement  of 
the  facts  of  shifting  concerning  the  general  property- 
tax  that  the  incidence  is  different  from  the  intended 
incidence  wherever  that  tax  fails  of  forming  a  com- 
plete system. 

SEC.  7.  The  incidence  of  a  land  tax  like  the  Eng- 
lish differs  somewhat  from  that  of  the  land  tax  as 

The  incidence  Part  of  the  general  property  tax,  inas- 
of  a  special  much  as  it  stands  entirely  apart  from  the 
system.  Still  there  are  some  points  in 
common.  Both  these  taxes  may  be  capitalised. 
That  is  the  taxed  property  will  sell  for  less  than 
it  would  bring  untaxed  by  the  amount  of  the  capital 
sum  which,  if  put  at  interest,  would  yield  the 
amount  of  the  tax.  In  the  case  of  the  general 
property  tax,  which  really  falls  upon  well  nigh  all 
land  of  any  value  whatever,  the  tax  as  we  have 
seen  falls  most  heavily  upon  the  producer  of  agri- 
cultural commodities.  But  the  English  land  tax 
has  been  capitalised  and  was  paid  for  all  suc- 
ceeding owners  by  the  owner  at  the  time  of  its 
assessment,  since  it  did  not  affect  all  lands  and  has 
become  a  fixed  charge  upon  the  property.  The 
same  is  generally  true  of  all  taxes  upon  land  which 
are  in  addition  to  a  regular  system  of  taxes  a  part  of 


1  For  the  rest  of  this  intricate  subject  the  student  is  referred  to 
the  larger  treatises. 


CHAP,  x  INCIDENCE  OF  TAXA  TION  257 

which   covers   the   revenue   from   land.     The  same 
may  be  said  of  a  special  building  tax.1 

Special  taxes  upon  certain  forms  of  fixed  capital, 
especially  when  they  stand  beside  a  general  system 
which  is  fairly  universal,  may  be  capital-  Incidence  of 
ised  in  the  same  way.     The  incidence  of  special  taxes 
taxes  on  profits  is  determined  by  the  con-  °    capltaL 
trol  which  the  recipient  of  profits  has  over  the  profits. 
If  the  control  is  so  great  that  he  can  virtually  raise 
them  at  will,  then  he  can  shift  the  burden.     But,  in- 
asmuch as  it  is  generally  true,  that  he  is  taking  all 
that  he  can  whether  he  be  taxed  or  not,  it  is  clear 
that  he   cannot   as   a   rule    shift   them.     Generally 
speaking,  then,  taxes  upon  profits  are  not  shifted. 
A  tax  on  successions,  also,  cannot  in  any  conceivable 
way  be  shifted. 

Poll  or  capitation  taxes  cannot  be  shifted  at  all. 
The  only  conceivable  case  in  which  they  might  be 
shifted  is  when  levied  upon  a  wage-  Shiftin  Of 
earner  at  the  point  of  starvation.  The  poll  taxes  and 
same  is  true  of  a  tax  on  the  lowest  wages.  wages  taxes' 
The  burden  would  mean  higher  wages  in  order  for 
the  labourer  to  live  and  meet  the  tax.  But  when  the 
wage-earner  is  of  a  higher  class,  it  is  to  be  presumed 
that  he  cannot  shift  his  tax  at  all,  for  that  presup- 
poses that  he  can  control  his  wages  sufficiently  to 
raise  them.  If  that  were  the  case  we  may  safely 
assume  that  he  would  raise  them  whether  the  tax 

1  See  Seligman,  p.  117. 


258         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

were  imposed  or  not.  He  cannot  therefore  shift 
them  at  all. 

A  tax  upon  income  cannot  be  shifted  if  the 
assessment  is  general  and  uniform.  But  as  a 
matter  of  fact  no  such  tax  is  general  or  uniform, 
and  it  will  be  shifted  or  not  according  as  it  splits 
up  into  other  taxes  upon  rent,  interest,  wages,  etc; 

In  conclusion :  the  intention  of  the  law-giver  as 
to  the  incidence  of  taxation  will  be  fully  realised 
only,  (1)  when  the  system  is  theoretically  perfect, 
and  (2)  when  the  execution  of  the  law  is  perfect. 
The  worst  cases  of  shifting  arise  when  serious  gaps 
are  left  in  the  tax  system,  or  when  the  administra- 
tion of  the  system  is  so  lax  in  parts  as  to  result  in 
a  crippling  of  the  whole.  Shifting  always  acts  to 
intensify  existing  inequalities.  The  problems  of 
incidence  are  among  the  most  important  of  our 
subject.  The  law-maker  may  with  the  best  of  in- 
tentions work  the  greatest  imaginable  injury;  and 
the  necessity  for  a  careful  study  of  the  probable 
effects  of  each  new  tax  cannot  be  over-estimated. 


CHAP,  xi      FEES  AND  INDUSTRIAL  EARNINGS  259 


CHAPTER    XI 

FEES   AND   INDUSTRIAL  EARNINGS1 

SECTION  1.   There  is  the  closest  sort  of  connection 
between  fees   and   the   industrial    and    commercial 
earnings  of  the    State.     In  the  case  of  2%e  connec. 
the  sale  of  goods  or  services  by  a  State  tion  between 

fees  and  in- 

the  private  persons  pay  the  price  of  the  dustrial  earn- 
wealth  which  they  obtain.  The  price  inff** 
is  fixed  by  economic  conditions.  It  cannot  exceed 
a  certain  sum,  for  if  it  does  the  citizen  will  not  buy. 
But  in  most  cases  considerations  of  a  public  charac- 
ter induce  the  State  to  enter  upon  the  industry  or 
commercial  enterprise,  and  these  very  considerations 
are  inducements  to  a  lowering  of  tUfe  charges.  As 
the  public  element  comes  to  be  more  clearly  recog- 
nised, a  part  of  the  economic  forces  fail  to  act. 
The  State  sacrifices  part  or  all  of  the  gain,  but  makes 
no  loss.  As  the  public  element  presses  still  more  to 
the  front,  the  State  pays,^at  the  general  cost,  a  part 
of  the  expense,  and  charges  the  particular  persons 
specially  benefited  merely  a  fee  for  the  service. 
Many  modern  public  institutions  have  gone  through 
a  process  of  development  from  one  stage  to  the  other, 
and  the  different  stages  are  found  contemporaneously 
1  For  definitions  and  classification  see  Chapter  II. 


260         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

in  different  countries.  But  while  this  is  the  order  of 
progression  in  new  functions,  it  is  not  the  histori- 
cal order  of  the  rise  of  these  two  forms  of  payment 
for  public  services.  Fees  are  the  older  of  the  two. 

Fees  are  not  to  be  found  in  the  ancient  civilisa- 
tions, because  of  the  intimate  relation  between  the 
Fees  and  the  individual  and  the  State.  Only  when 

l^puw™"*  there  is  a  distinct  consciousness  of 
life.  "  public  "  functions  can  we  have  fees. 

Payments  in  the  middle  ages  for  the  services  of  the 
courts,  of  the  church,  of  the  schools,  etc.,  were  mainly 
of  the  nature  of  private  remuneration.  As  soon, 
however,  as  any  function  comes  to  be  recognised  as 
public  in  character,  fees  arise.  At  first  contributions 
are  more  or  less  freely  and  willingly  rendered  for  the 
use  of  markets,  roads,  bridges,  protection,  and  the 
like.  Frequently  there  is  an  arbitrary  assumption 
made  that  a  special  benefit  is  conferred  and  a  fee  is 
charged.  As  tne  State  emerges  from  feudalism,  the 
growth  of  public  consciousness  is  marked  by  a  rapid 
multiplication  of  these  fees,  which  form  a  system  of 
public  revenues  without  taxes.  After  that  the  line 
of  development  is  in  the  direction  of  the  curtailment 
of  the  fee  system  and  the  growth  of  the  tax  system. 
Fees  mark  the  transition  stage  in  the  division  of 
labour  in  the  public  service.  There  is  a  growth  of 
the  conception  of  common  benefits  as  distinct  from 
special  private  benefits,  and  a  corresponding  removal 
of  functions  from  one  to  the  other  category.  At  the 
same  time  new  functions  arise  which  are  supported 


CHAP,  xi       FEES  AND  INDUSTRIAL   EARNINGS  261 

by  fees,  until  finally  the  recognition  of  public  in- 
terest outweighs  that  of  the  individual  interest. 
Some  fees,  however,  become  fixed  in  Fees  emerge 
character  and  are  not  subject  to  these  into  taxes- 
transforming  tendencies ;  but  the  public  interest  is 
recognised  in  this  case  by  limiting  the  fees  to  a  very 
small  part  of  the  total  cost.  Thus  many  court 
fees  are  retained,  but  the  larger  part  of  the  rapidly 
growing  expenditure  for  the  support  of  justice  is 
now  met  from  taxes.  Those  functions,  in  con- 
nection with  which  there  are  fees,  are  regarded  as 
conferring  a  divided  benefit.  The  individual  pays 
for  what  he  receives,  the  State  for  what  the  public 
gains  thereby. 

SEC.  2.  The  extension  of  the  fee  system  by  the 
courts  to  cover  a  very  large  part  of  the  cost  of  the 
judicial  system,  even  to  such  a  degree  as  judicial  and 
to  make  litigation  impossible  to  all  but  kgaifees. 
the  rich,  was  a  transition  stage  in  the  develop- 
ment from  the  middle  ages  to  the  present.  No- 
where was  the  fee  system  for  court  costs  more  abused 
than  in  England.  Later  practice,  while  placing 
more  of  the  burden  on  the  general  treasury,  has  re- 
tained an  extensive  tariff  of  such  "costs."  More- 
over in  not  a  few  instances,  the  assessment  of  the 
"  costs  "  upon  the  party  responsible  for  the  litigation, 
as  shown  by  the  fact  that  he  loses  his  suit,  makes 
these  fees  approach  in  character  punitive  fines. 
This  is  the  characteristic  of  American  practice. 
In  many  cases  the  special  benefit  conferred  is  not 


262         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

very  clear,  but  is  arbitrarily  assumed  to  exist  and  the 
fee  levied  as  though  it  were  for  such  benefit. 

Since   the   middle   of  the  seventeenth  century,  a 
large  part  of  many  of  the  legal  fees  have  been  col- 
The  collection   ^ec^e(^  ^7  means  of   stamps   or  stamped 
of  fees  by         paper,  the  latter  being  necessary  to  le- 
imps'  galize  the  transaction  ;    the  officer  who 

furnished  or  cancelled  the  stamp  being  supposed 
to  investigate  and  vouch  for  the  propriety  of 
the  transaction.  A  notary's  fee  in  most  of  the 
American  commonwealths  is  of  this  character,  the  fee 
being  receipted  for  by  a  stamp  embossed  upon  the 
paper.  Similar  fees  or  taxes  on  acts  and  transfers 
are  very  common  in  France.  Other  such  fees  are 
collected  in  the  form  of  the  sale  of  a  license  to  per- 
form certain  acts  which  would  not  be  legal  without 
such  a  permit ;  •  and  then  there  is  a  charge  for  record- 
ing the  act  after  it  has  been  performed  in  accord 
with  the  permit.  Of  this  character  are  the  fees  for 
marriage  licenses  and  recording  of  marriages.  The 
act  itself  is,  also,  often  subject  to  the  payment  of  a 
tax.  The  general  character  of  the  legal  fee  is  seen 
from  the  following  list :  fees  for  passports  and  similar 
papers  of  identification,  fees  for  recording  and 
legally  recognising  births,  deaths,  marriages,  and 
divorces,  changes  of  residence  or  legal  standing,  for 
papers  in  evidence  of  honours,  degrees,  orders,  titles, 
offices,  etc.,  for  patent  rights  and  copyrights,  for 
consular  services  in  vouching  for  invoices,  etc. 

SEC.  3.    Many  of  the  acts  of  the  various  adminis- 


CHAP.  XI       FEES  AND  INDUSTRIAL  EARNINGS  263 

trative  departments  are  of  such  a  character  as  some- 
time to  confer  a  special  benefit  upon  individuals 
for  which  a  fee  is  charged.  The  police 
may  render  extraordinary  services  as  in  ti 
the  protection  of  property  on  special  occasions,  on 
the  control  of  masses  of  people,  preventing  intrusion, 
etc.  Examples  of  these  special  services  are  very 
frequent.  The  same  is  true  of  the  special  services 
of  detectives  for  private  persons. 

Fees  for  public  education  are  gradually  falling 
into  disuse.  They  were  originally  charged  for  all 
grades  of  instruction  from  the  lowest  up  Educational 
to  the  university.  The  importance  of  Sees- 
primary  education  to  the  general  welfare  of  the 
people  and  to  the  prosperity  of  the  State,  when 
governed  by  popular  franchise,  led  to  the  abolition 
of  fees  for  that  grade  of  instruction  at  a  very  early 
date.  In  England,  owing  to  the  prevalence  of  an 
extreme  laissez-faire  view  upon  this  subject,  fees 
for  education  were  continued  longer  than  in  most 
countries,  having  only  very  recently  been  entirely 
abolished.  In  the  higher  grades,  wherever  such 
were  in  charge  of  the  State,  fees  were  retained 
much  longer  than  elsewhere.  The  great  univer- 
sities of  the  American  commonwealths  have  set 
the  example  of  free  tuition  for  their  thousands 
of  students,  although  they  still  retain  a  number  of 
small  fees  for  registration,  diplomas,  and  certain 
incidental  expenses  connected  with  laboratory  and 
similar  instruction.  European  State  universities 


264         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

still  generally  retain  the  fee  system  for  most  of  the 
lecture  courses.  Schools  intermediate  between  those 
giving  rudimentary  education  and  the  universities 
are  generally  managed  without  fees,  like  the  lower 
grades.  Educational  functions  of  governments  seem 
to  have  been  going  through  the  same  transformation 
which  roads  have  gone  through.  Already  the  larger 
part  of  the  cost  is  met  from  general  taxes  and  but  a 
small  part  from  fees.  Finally  the  remaining  fees 
will  fall  away. 

In  those  countries  in  which  the  State  supports  the 
churches,  or  churches  of  a  certain  denomination, 
there  are  a  number  of  fees  connected 
therewith,  such  as  those  for  the  use  of 
churches  and  church-yards,  for  baptisms,  christen- 
ings, marriages,  burials,  confirmations,  and  com- 
munion. The  means  for  meeting  the  rest  of  the 
expenses  are  drawn  from  two  sources.  A  part  is 
sometimes  taken  from  the  general  taxes  or  from 
special  taxes  collected  for  the  purpose,  and  the 
remainder  from  voluntary  contributions  by  the 
attendants,  or  from  the  sale  of  sittings  and  the  like. 
This  is  the  only  important  remnant  of  voluntary 
contributions  in  any  part  of  the  financial  system. 
In  most  instances  the  voluntary  contributions  are 
for  special  purposes,  organised  charity,  missions, 
etc.,  which  are,  perhaps,  not  properly  considered  of 
a  public  character. 

The   fees   rendered  by  individuals  in  connection 
with  their  industrial  and  commercial  enterprises  are 


CHAP,  xi       FEES  AND  INDUSTRIAL  EARNINGS  265 

very  numerous.     The  oldest  and  simplest  are  charges 
for  the  use  of  market  places,  later  for  the  use  of  public 
exchanges,  etc. ;  then  come  the  charges   The  fees  for 
for  statistics  collected  by  public  officers,  ""*<*•  <*f** 

J   J  '    State  to  pri- 

and  the  charges  for  the  use  of  bridges,  vate  industry. 
roads,  quays,  etc.  The  modern  substitutes  for  roads: 
railroads,  canals,  street  railroads,  omnibuses,  are 
already  passing  from  private  into  public  hands  and 
the  period  of  transition  is  marked  by  a  more  and 
more  extended  use  of  the  fee  system.  Other  means 
of  communication,  the  post,  the  telegraph,  and  the 
telephone,  are  of  the  same  character.  Fees  for 
coinage  are  also  for  services  to  commerce.  They 
are  in  use  by  every  country  in  some  form  or  other. 
In  the  United  States  the  charge  for  coinage  was  one- 
fifth  of  one  per  cent.  England  allows  the  Bank  of 
England  to  make  a  similar  charge  when  advancing 
notes  upon  bullion,  and  to  set  the  price  in  notes  for 
gold  coin  and  gold  bars.  These  fees  must  not  be 
confused  with  the  charges  known  as  seigniorage,  the 
latter  being  a  tax  upon  commerce. 

SEC.  4.  One  of  the  most  important  classes  of  fees 
is  formed  by  special  assessments.  They  are  for  some 
benefit  to  real  property.  A  special  assess-  special  assess- 
ment is  a  fee  paid  to  cover  the  cost,  less  menfs- 
that  of  supervision  by  a  salaried  public  officer,  of  a 
specified  improvement  to  property  undertaken  in  the 
public  interest.  In  his  excellent  study  on  this 
subject  Mr.  Rosewater1  tries  to  establish  a  difference 
1  Columbia  College  Studies,  II.,  3. 


266         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

between  fees  and  special  assessments.  He  admits 
the  similarity,  but  points  out  that  special  assess- 
Spedai  assess-  ments  are  restricted  in  purpose  and  in 
ments  are  fees,  place,  are  apportioned  among  the  mem- 
bers of  a  class,  are  assessed  once  and  for  all  and  for 
benefits  to  real  property  only.  Professor  Seligman 
makes  the  same  distinction.  But  it  is  certainly  not 
defensible  on  purely  theoretical  grounds,  for  the 
differences  are  not  essential  but  accidental.  We 
might  as  well  set  up  a  separate  class  of  taxes  on 
marriages,  for  they  are  restricted  in  purpose,  are 
assessed  upon  members  of  a  class,  once  and  for  all, 
and  are  for  benefits  to  the  family  only.  Like  all 
other  fees,  special  assessments  are  imposed  by  the 
taxing  power,  cover  both  public  and  private  benefits, 
and  do  not  exceed  the  costs. 

The  simplest  case  of  a  special  assessment  is  when 
a  street  is  to  be  built,  with  necessary  sewers  and 
Example  of  a  water-pipes.  The  costs  of  this  have  to 
special  assess-  be  met.  There  is  a  public  interest  in 
the  street  as  a  thoroughfare.  Private 
enterprise  cannot  be  trusted  to  properly  protect  the 
public  interest.  The  city,  therefore,  must  step  in. 
It  could  pay  the  cost  from  general  taxes  or  from 
tolls,  of  both  of  which  the  specially  benefited  persons 
would  pay  their  share.  But  in  that  case,  tempo- 
rarily at  least,  the  abutting  land-owners  would  reap 
an  unearned  harvest  at  the  expense  of  their  fellow- 
citizens.  It  appeals  to  our  sense  of  justice  that  they 
should  pay  for  it.  They  can  always  afford  to  do  so, 


CHAP,  xi       FEES  AND   INDUSTRIAL  EARNINGS  267 

as  they  gain  by  the  improvement.  This  system  has 
received  large  currency  in  the  United  States,  and  has 
according  to  Mr.  Rosewater's  extensive  investiga- 
tions given  general  satisfaction. 

Another  method  has  been  used  to  some  extent  in 
England.  It  is  similar  to  that  used  by  private 
speculators  in  America,  when  they  open  up  a  new 
city,  or  suburb.  The  city  condemns  and  buys  up 
enough  of  the  land  to  be  improved  to  furnish,  when 
sold  after  the  improvements,  the  funds  needed. 
This  method  has  a  very  limited  application. 

Special  assessments  are  not  frequent  in  Europe,  but 
do  occur.  Mr.  Rosewater  finds  them  in  varied  form  in 
France  and  Germany  ;  and  they  are  pro-  s  ecial  ^^ 
posed  in  England  under  the  name  of  the  ments  not  used 
"betterment"  tax.  In  the  last-named  inEur°Pe- 
country  they  were^early- applied  to  "walls,  ditches, 
gutters,  sewers,  bridges,  etc.,  damaged  by  the  sea." 
But  not  until  lately  has  the  principle  of  measuring 
the  tax  by  the  particular  Benefit  been  applied  ur*pro- 
posed,  and  even  now  the  principle  is  not  quite  clear. 
In  England  the  assessment  is  to  cover  the  cost  of 
the  removal  of  injury  rather  than  the  cost  of  con- 
ferring a  beneUE In  England  the  cost  of  improve- 
ments is  assessed  in  general  taxes  from  which  certain 
unbenefited  districts  are  exempt.  Strictly  speaking, 
the  principle  is  not  regularly  applied  in  England 
at  all. 

In  the  United  States  this  fee  finds  almost  uni- 
versal acceptance.  It  is,  indeed,  remarkably  well 


268         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

suited  to  the  economic  conditions  of  a  new  country, 
and  renders  rapid  improvement  possible.     In  some 

parts  of  the  country  there  are  harmful 
Good  results      r 

in  the  United  results  that  arise  from  the  desire  to 
give  property  owners  full  control  over 
the  improvements  for  which  such  assessments  are  to 
be  made.  Thus,  in  some  commonwealths,  street  im- 
provements are  only  made  with  the  consent  of  the 
owners  of  a  majority  of  the  property  concerned. 
The  result  is  that  streets  are  opened  irregularly,  and 
some  of  the  main  streets  are  untouched  while  side 
streets  are  improved.  But  this  is  an  evil  of  expen- 
diture rather  than  necessarily  connected  with  this 
mode  of  collecting  the  revenue.  The  abuses  of  spe- 
cial assessments  are  few,  and,  on  the  whole,  it  is  a 
part  of  the  tax  system  of  which  America  can  be  justly 
proud.  Professor  Bastable's  criticism  (p.  377)  of 
these  fees  rests  upon  a  misconception  of  the  method 
of  handling  the  assessments.  They  are  assessed 
according  to  the  cost  of  the  improvements  ;  the 
special  benefit  is  the  justification  of  the  contribu- 
tion, not  its  measure.  There  is  seldom  any  difficulty 
in  apportioning  the  cost  fairly.  No  charge  need  be 
made  for  any  additional  benefit  beyond  the  cost,  and 
the  contributor  has,  usually,  a  voice  in  deciding 
whether  the  proposed  improvement  shall  be  under- 
taken or  not. 

In  view  of  the  fact  that  the  prevailing  theory 
of  taxation  in  this  country  is  that  which  we  have 
designated  as  the  benefit  theory,  it  is  natural  that 


CHAP,  xi       FEES  AND  INDUSTRIAL   EARNINGS  269 

Americans  should  have  been  the  ones  to  have  made 
the  application  of  the  theory  in  this  particular  case. 
The  special  assessment  is  applied  in  just  „ 

Special  assess- 

those  cases  in  which  it  is  easiest  to  ments  and  the 
measure  the  special  benefit.  And  al-  benefit  theory' 
though  the  principle  cannot  be  given  a  wider  appli- 
cation with  any  degree  of  satisfaction,  it  does,  in 
this  instance,  comply  with  the  demands  of  justice 
and  equality.  It  would,  moreover,  be  rather  hard  to 
find  under  the  faculty  theory  any  better  justification. 
SEC.  5.  The  post  was  included  above  among  those 
functions  for  which  fees  were  charged.  Whether 
that  be  quite  correct  or  not  depends  upon 

r  .      Postal  fees. 

the  way  in  which  the  postal  system  is 
run.  If  it  is  run  so  as  to  yield  the  largest  possible 
revenue  over  and  above  expenses,  it  is  of  exactly  the 
same  character  as  any  other  industrial  enterprise  upon 
which  the  State  enters.  The  State  sells  postal  ser- 
vices for  the  highest  price  it  can  get,  or  rather,  for 
the  largest  net  return.  Its  profits,  the  post  office 
being  a  monopoly,  are  regulated  by  the  principle  of 
charging  what  the  traffic  will  bear.  But  no  post 
office  is  run  on  this  principle.  The  importance  of 
the  public  service  rendered  has  led  to  the  recog- 
nition of  a  large  element  of  common  benefit.  This 
recognition  has  not  resulted  in  the  entire  abandon- 
ment of  charges  for  the  service  except  in  a  few 
instances ;  for  example,  the  free  carriage  of  news- 
papers in  the  county  in  which  they  are  published. 
But  it  has  led  to  the  attempt  to  run  the  service  in 


270         INTRODUCTION  TO  PUBLIC  FINANCE     PART  n 

such  a  way  that  expenses  shall  be  met,  and  only  a 
small  surplus,  if  any,  shall  accrue  to  the  benefit  of  the 
treasury.  Whenever  the  surplus  tends  to  grow,  the 
rates  are  lowered  or  the  service  improved.  Of  all 
the  powers,  Great  Britain  is  the  sole  exception  to 
this  rule,  about  one-third  of  her  postal  receipts  be- 
ing profits.  (1895,  receipts  £10,760,000,  expenses 
,£6,869,000.  But  the  allied  telegraph  service  ran 
behind;  receipts  X 2,580,000,  expenses  £2,674,000.) 
The  postal  rates  in  Great  Britain  are  as  low  as  in 
other  countries,  but  the  surplus  is  accounted  for  by 
the  extremely  small  size  of  the  territory  covered 
by  the  land  service,  the  concentration  of  population, 
and  the  cheapness  of  water  transportation,  all  of 
which  makes  it  particularly  easy  to  do  a  large  and 
profitable  business  at  low  rates. 

There  are  some  writers  who  regard  any  surplus 
acquired  in  this  way  as  practically  the  result  of  tax- 

Postal  surplus    ation>  and  claSS  ai^  charS6  f°r   the   Pub' 

not  the  result  lie  service,  above  the  cost  thereof,  as  a 
on'  special  tax.  This  classification  presup- 
poses that  the  service  is,  by  nature,  of  a  public 
character,  an  assumption  contrary  to  the  fact,  for  no 
function  except  that  of  governing  itself,  in  the  nar- 
rowest possible  sense,  is  by  nature  of  a  public  charac- 
ter, nor,  on  the  other  hand,  by  nature  of  a  private 
character.  On  this  consideration,  therefore,  it  is 
better  to  class  these  gains,  not  as  taxes,  but  as  the 
earnings  of  a  public  industry. 

SEC.  6,   In  modern  times  public  industries  can  be 


CHAP.  XI       FEES  AND  INDUSTRIAL   EARNINGS  271 

quite    as    properly    considered   under   the    head    of 
expenditure  as  under  that  of  revenue.     Historically, 
State   industries,  like   public   or   princely  domains, 
lands,  forests,  and  mines,  were  mainly  public  indus- 
sources  of  revenue.      But  a  railroad  is  tHernofpr*- 
placed  in  the  hands  of  the  State  primarily  5a^e  Qfreve. 
because  of  the  public  interests  involved,  nm- 
and  the  expenditure  for  that  purpose  is  more  signifi- 
cant than,   the  moderate  surpluses   that   accrue,  in 
some  cases,  to  the  government.     For  that  reason  we 
called  attention  to  these  activities  under  the  head  of 
expenditure.      We   have  now  to  consider   them  as 
productive  of  so  much  total  wealth,  a  part  of  which 
is  immediately  spent  for  the  purpose  which  led  the 
State  into  this  activity,  and  a  part,  generally  a  very 
small  part,  saved  to  assist  in  the  accomplishment  of 
other  purposes. 

The  oldest  form  of  public  property  is  land.  The 
public  land  originally  embraced  all  the  territory  of 
the  State.  Gradually  parts  of  it  were 

Public  lands. 

alienated  to  a  private  purpose  subject 
only  to  the  law  of  eminent  domain;  but  considerable 
portions/ even  to  the  present  day  belong  to  the  State, 
or  what  is  the  same  thing,  to  the  local  governments. 
In  the  monarchies  of  Europe  such  lands  were  once 
considered  the  property  of  the  prince.  These  lands 
were  the  main  reliance  for  public  revenues  in  the 
feudal  State.  As  the  people  gained  a  voice  in  the 
government  they  laid  claim  to  these  sources  of 
revenue  for  public  purposes.  From  that  time  on, 


272         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

the  public  domain  diminished  both  absolutely,  by 
sale  or  alienation,  and  relatively  as  the  wealth  of 
the  people  swelled.  Some  countries  adopted  a  very 
conservative  policy  in  this  respect,  and  retained 
their  domains  in  land  and  forests,  while  others 
adopted  the  plan  of  steadily  disposing  of  them, 
German  states  are  examples  of  the  former  policy, 
while  England,  France,  and  the  United  States  have 
been  examples  of  the  latter.  England  receives  only 
£400,000  annually  of  "Woods,  Forests,  and  Land 
Revenues  of  the  crown."  In  the  United  States  it 
was  the  possession  of  vast  tracts  of  land  by  the 
federal  government,  acquired  by  gift  from  the  com- 
monwealths, and  by  purchase,  which  gave  that  gov- 
ernment an  independent  territory  over  which  its 
control  was  absolute  and  formed  one  of  its  strongest 
supports,  contributing  most  materially  to  the  growth 
of  federal  influence.  But  the  public  lands  have  not 
been  a  source  of  revenue  to  the  government.  The 
money  received  from  settlers  has  amounted  to  little 
more  than  fees  for  the  registration  of  titles,  and  ex- 
cept for  the  ten  years  from  1830  to  1840  the  lands 
have  not  yielded  a  clear  revenue.  The  extensive 
surveys  which  the  government  carried  out  have  been 
a  large  expense  attributable  to  this  source.  Under 
constitutional  government  there  is  little  danger  of 
the  failure  of  taxation  as  a  permanent  and  regular 
source  of  revenue.  So  that  public  lands  are  not  re- 
garded as  necessary  for  the  integrity  of  the  govern- 
ment. The  retention  of  public  lands  in  Germany 


CHAP,  xi       FEES  AND  INDUSTRIAL  EARNINGS  273 

and  Austria  is  not  explainable  by  any  danger  of  the 
failure  of  taxation,  but  by  the  greater  tenacity  of 
the  older  communistic  idea.  Democrat-  No  reason  for 
ically  governed  cities  and  towns  cling  to  th&r^ention 

of  public  lands 

their  lands  as  strongly  as  the  royal  gov-  to-day. 
ernments.  Prussia's  public  lands  and  forests  yield 
about  50,000,000  M.  annually  after  all  expenses  have 
been  met.  Cities  and  towns  get  as  much  more,  and 
in  many  cases  supply  burgher  families  with  wood 
without  charge.  In  Russia  the  process  of  emanci- 
pating the  serfs  has  changed  the  receipts  from 
public  lands  into  taxes,  and  left  practically  little 
revenue  of  the  older  character.  In  spite  of  the  ab- 
sence of  constitutional  government  Russia  has  gone 
faster,  in  proportion  to  wealth  and  revenues,  in  the 
abolition  of  public  domains  than  many  German 
states.  Russia's  gross  receipts  from  domains  are 
about  $12,500,000,  while  Prussia's  are  nearly  $22,- 
000,000.  The  alienation  of  public  lands  in  Russia 
is  recent,  and  it  has  progressed  as  that  country 
advanced  in  civilisation. 

Except  when  in  charge  of  a  highly  trained  body 
of  expert  officials,  as  in  Germany,  the  public  lands 
do  not  form  a  satisfactory  source  of  rev-  Public  control 
enue.  They  are  not  as  a  rule  as  well  off°rests  a 

public  neces- 

managed    as   similar    lands   in    private  sity. 
hands.     Forests  form  an  important  exception  to  this 
statement.     A  private  owner  cannot  afford  to  wait 
long   enough   for   economical   use    of   timber   land. 
The  destruction  of  forests  at  private  hands  is  a  seri- 


274         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

ous  danger.  Only  a  permanent,  long-lived  institu- 
tion like  the  government  can  take  proper  care  of 
forests. 

Closely  allied  with  the  public  ownership  of  lands 
and  forests  is  the  public  ownership  of  mines.  This  is 
Ownership  of  one  °f  the  oldest  State  industries,  which 
mines.  is  of  iate  falling  into  disuse.  The  work- 

ing of  mines  by  the  government  is  being  replaced  in 
Europe  by  a  system  which  allows  of  private  opera- 
)  tion,  but  guarantees  the  public  interest  by  the  col- 
1  lection  of  royalties,  or  mining  taxes.  In  the  older 
countries,  where  the  idea  of  public  territorial  owner- 
ship is  stronger,  the  old  system  still  prevails,  and, 
even  where  it  is  partially  surrendered,  the  revenues 
derived  from  royalties  and  taxes  are  proportionately 
large.  But  in  the  new  countries  of  the  American 
continent  and  Australia  private  ownership  generally 
prevails,  and  no  more  revenue  is  derived  from  this 
source  than  from  any  other  taxed  industry.  The 
feudal  idea  of  territorial  ownership,  a  remnant  of 
of  which  still  survives  in  those  countries  of  Europe 
which  retain  their  interests  in  the  mines,  is  very 
different  from  that  of  private  ownership  in  fee 
simple  as  in  America.  This  accounts  for  the  dif- 
ference in  the  revenues  from  this  source. 

SEC.  7.  But  while  the  modern  State  has  surren- 
dered the  extractive  industries,  a  great  many  others 
Other  Indus-  have  been  undertaken,  not  so  much  as 
tries.  sources  of  revenue  as  because  of  the 

importance  of   the  public   interests  involved.      Be* 


CHAP.  XI       FEES  AND  INDUSTRIAL   EARNINGS  275 

fore  this  century  the  most  striking  instances  are  of 
the  production  of  some  commodity  needed  for  the 
public  service  or  of  articles  of  an  artistic  and  costly 
character.  Examples  of  the  latter  are  the  Gobelin 
tapestries  and  the  Sevres  ware.  In  supplying 
arms,  forts,  vessels,  public  buildings,  and  the  like 
there  is  no  uniformity  of  practice  among  the  nations. 
In  only  a  few  cases  is  the  method  regularly  that  of 
government  production.  There  is  a  similar  absence 
of  uniformity  in  practice  in  reg'ard  to  all  those  in- 
dustries which  involve  large  public  interests  for  the 
conservation  of  which  there  is  under  private  manage- 
ment no  good  guarantee.  In  some  cases,  as  the 
water  supply,  there  is  a  general  tendency  in  the 
direction  of  public  ownership.  Whenever,  as  in  this 
case,  a  public  interest  is  absolutely  -paramount  to 
every  other  consideration,  there  is  little  attempt  to 
make  the  industry  a  source  of  revenue  beyond  what 
is  necessary  to  maintain  the  service.  These  indus- 
tries, therefore,  tend  rapidly  to  be  supported  by  fees 
or  taxes.  Inasmuch  as  it  is  generally  the  impor- 
tance of  the  public  interest  that  led  to  the  assump- 
tion of  the  industry  by  the  government,  this  tendency 
is  universal.  Roads,  canals,  the  water  supply,  the 
post  office,  telegraph,  telephone,  and  the  railroads 
all  pass  more  or  less  rapidly  through  these  stages 
according  to  the  importance  ascribed  to  the  public 
interest  in  them.  As  already  seen,  the  post  office 
is  now  primarily  supported  by  fees.  The  funds  for 
the  support  of  water-works  are  generally  collected 


276         INTRODUCTION  TO  PUBLIC  FINANCE      PART  n 

from  the  users,  as  fees,  or  from  certain  classes  of 
persons  as  special  taxes,  but  seldom  as  prices  for  the 
service.  The  experience  of  nations  with  State-owned 
railroads  is  too  recent  and  too  varied  to  be  very 
instructive.  States  have  been  led  into  the  owner- 
ship and  operation  of  railroads  :  first,  because  the 
roads  needed  the  support  of  public  credit;  second, 
because  of  military  interests ;  third,  because  of 
the  failure  of  private  companies  to  protect  public 
interests.  Railroads  have  more  often  been  a  source 
of  public  expenditure  than  of  public  revenue.  In 
Prussia  alone  have  the  financial  results  been  such  as 
to  add  materially  to  the  income  of  the  treasury. 
The  question  of  government  ownership  of  railroads 
is  one  involving  considerations  broader  than  merely 
fiscal  ones  and  does  not  properly  belong  to  our 
subject.  In  no  case  is  it  at  all  likely  that  merely 
fiscal  considerations  will  have  more  than  a  deterrent 
effect  upon  the  solution  of  the  problem  of  the  gov- 
ernment's action  in  regard  to  the  management  of  the 
railroads. 

While  the  industrial,  commercial,  or  other  eco- 
nomic functions  of  the  State  are  of  continually  grow- 
Pubiic  Indus-  ing  importance,  they  are  not  likely  to  be 

*y  not  likely  largely  a  gource  of  net  revenue.  No- 
to  be  a  source  °  J 

of  net  revenue,  where  do  we  find  principles  that  would 
lead  us  to  anticipate  that  revenues  of  this  character 
will  ever  supply  the  place  of  taxes.  Indeed,  if  the 
usual  evolution  continues,  these  functions  may  be 
performed,  by  the  State  without  a  special  charge 


CHAP,  xi      FEES  AND  INDUSTRIAL  EARNINGS  277 

upon  the  benefited  persons,  and,  while  the  liberties 
of  the  people  in  respect  to  the  enjoyment  of  these 
facilities  will  be  greater,  the  burden  thrown  upon 
general  taxation  will  be  equally  so.  If  a  city  now 
supplies  a  sewer  system  to  citizens  free  of  special 
charge  except  for  first  construction,  it  may  with  the 
same  logic  supply  water.  If  a  State  furnishes  roads 
at  common  cost,  it  may  certainly  so  far  modify  the 
management  of  railroads  as  to  apply  the  fee  system 
and  forego  the  collection  of  any  surplus,  though  in 
this  case,  as  in  that  of  the  post  office,  there  would 
seem  to  be  as  yet  no  sign  of  any  tendency  to  go 
beyond  the  fee  system. 


PART   III 
PUBLIC  INDEBTEDNESS 

CHAPTER  I 

THE  GROWTH  AND  NATURE  OP  PUBLIC  CREDIT 

SECTION  1.  The  national  governments  of  the  civ- 
ilised world  to-day  owe  more  than  twenty-seven  and 
The  size  of  one-half  thousand  millions  of  dollars,  or 
public  debts.  five  an(j  one-half  thousand  million  pounds 
sterling.  With  the  addition  of  the  debts  owed  by 
the  local  governments  "this  sum  exceeds  thirty  thou- 
sand millions  of  dollars,  or  six  thousand  million 
pounds.  The  exact  figures  according  to  the  Eleventh 
Census  of  the  United  States  are  : 

National  debt  of  all  countries        .        .  $27,524,976,915 
Local  debt  of  aU  countries      .        .         .       2,824,950,694 

Total        ....  $30,349,927,609 

According  to  the  best  authorities  the  national  in- 
debtedness of  the  world  has  increased  fourfold  since 

1848. 

278 


CHAP.  I  NATURE   OF  PUBLIC   CREDIT  279 


Years. 

Aggregate  debt. 

Increase. 

Per  cent 

of  increase. 

1848    . 

.     $7,627,692,215 

1860     . 

.     10,399,341,688 

$2,771,649,473 

36.34 

1870    . 

.     17,117,640,428 

6,718,298,740 

64.60 

1880    . 

.     27,421,037,643 

10,303,397,215 

60.19 

1890    . 

.     27,524,976,915 

103,939,272 

.38 

[From  the  Eleventh  Census.] 

The  increase  of  national  indebtedness  since  1880 
has  been  comparatively  slight.  But  this  is  partly 
due  to  the  payment  of  a  large  part  of  the  national 
debt  of  the  United  States.  Other  countries  have 
continued  the  process  of  debt-making  —  although  less 
rapidly,  owing  to  the  continuance  of  peace.  The 
above  figures  do  not  include  pensions,  which  are 
really  debts  in  the  form  of  annuities.1 

While  the  absolute  amount  of  the  debt  has  in- 
creased, the  burden  has  materially  decreased  since 
1880,  owing  to  the  increase  in  popula-  Th&  burden 
tion  and  wealth.  In  1880,  the  national  has  decreased 
indebtedness  of  countries  other  than  the  s 
United  States  amounted  to  $35.64  per  capita,  while 
in  1890  it  was  132.90  per  capita.  The  national  debt 
of  the  United  States  was  reduced  absolutely  by  over 
a  billion  dollars,  and  relatively  from  $38.33  per 
capita  to  $14.24  per  capita.  Of  course  statistics  of 
this  sort  are  neither  perfectly  accurate  nor  easy  to 
interpret.  The  only  proper  comparison  between 
different  countries  would  be  that  of  the  ratio  of  the 

1  If  these  were  included  and  capitalised  at  ten  years1  purchase, 
which  would,  perhaps,  be  a  fair  average,  they  would  add  to  thQ 
debt  of  the  United  States  at  least  $1,400,000,000. 


280         INTRODUCTION  TO  PUBLIC  FINANCE    PART  m 

interest  charge  to  the  annual  income  of  the  people. 
But  the  annual  income  is  very  difficult  to  ascertain, 
and  the  errors  would,  probably,  be  so  great  as  to 
destroy  the  significance  of  the  result.  But  these 
figures,  while  not  absolutely  correct,  are  sufficiently 
so  to  indicate  that  the  policy  of  borrowing  has  be- 
come a  most  vital  part  of  the  system  of  public 
finance.  The  cause  of  these  debts  is  almost  exclu- 
sively war  and  the  preparation  for  war.  If  the  ex- 
penses of  war  and  its  preparation  had  been  excluded 
from  the  finances  of  most  nations,  and  the  finances 
relieved  of  the  subsequent  burden  of  interest,  civil- 
ised nations  would  have  been  easily  able  to  meet 
their  current  expenses.  In  England  the  annual 
public-debt  charges  for  interest  and  debt  payments 
consume  more  than  one-fourth  of  the  annual  rev- 
enues from  every  source ;  £25,200,000  out  of  .£97,- 
297,361.  The  policy  pursued  by  England  is  to 
make  the  debt  charge  permanent  at  that  amount, 
using  all  that  can  be  saved  over  and  above  the  inter- 
est charges  for  the  payment  of  the  principal.  The 
funded  debt  of  France,  the  largest  ever  contracted 
by  any  country,  imposes  an  interest  charge  of  $176,- 
461,275  upon  a  total  revenue  of  $650,372,370.  If 
we  include  certain  annuities  and  pensions,  more  than 
one-third  of  the  revenues  of  France  are  consumed 
in  this  way. 

Germany  is  the  only  country  of  importance  that 
does  not  now  rely  entirely  upon  the  possibility  of 
borrowing  money  in  case  of  war.  That  country  has 


CHAP.  I  NATURE  OF  PUBLIC  CREDIT  281 

a  special  cash  reserve  of  $ 30,000,000,  which  is  avail- 
able for  immediate  application  to  war  purposes 
should  it  be  needed.  Although  the  Germany's 
German  Empire  began  in  1871  without  cash  reserve. 
debt,  it  now  has  a  debt  of  §85,000,000  in  excess  of 
its  available  assets.  This  is  all  due  to  armament. 
So  that,  although  Germany  holds  a  cash  reserve  for 
military  purposes,  it  is  practically  a  borrowed  one 
and  she  is  making  her  preparation  for  war  on  bor- 
rowed money.  This  policy  does  not  differ  essen- 
tially from  that  of  other  countries.  In  the  middle 
ages,  however,  as  in  classical  times,  it  was  the  prac- 
tice of  nations  to  accumulate  a  treasure  for  war  pur- 
poses in  advance,  by  collecting  more  revenue  each 
year  than  was  needed.  This  practice  is  now  obso- 
lete and  is  also  indefensible  as  too  costly.1 

Modern  nations,  then,  practise  a  method  of  deficit 
financiering.  They  make  provision  in  their  annual 
revenues  for  the  current,  regular,  or 
" ordinary"  expenditures  only,  and  rely 
for  funds  at  other  times  upon  their  ability  to  borrow. 
What  then  constitutes  this  ability  to  borrow  upon 
which  so  much  reliance  is  placed  that  even  the  very 
existence  of  the  nation  is  allowed  to  depend  upon  it  ? 
Since  when,  and  how  is  it  that  nations  have  been 
able  to  rely  so  absolutely  upon  public  credit?  The 
answer  to  both  these  questions  is  contained  in  the 
analysis  of  public  credit. 

SEC.  2.    Public  credit  is  only  one  form  of  general 
i  See  Bastable,  p.  667. 


282         INTRODUCTION  TO  PUBLIC  FINANCE    PART  m 

credit,  and  it  is  comparatively  easy  to  point  out 
Public  credit  wnerein  the  former  differs  from  the  lat- 
aformofgenr  ter.  But  credit  in  itself  is  by  no  means 
***'  easy  to  define.  Scarcely  any  two  of  the 
able  writers  who  have  treated  the  subject  are  agreed 
as  to  its  most  important  features.  It  has,  moreover, 
Difficult  to  as  a  term  in  common  use,  suffered- so 
define  credit.  many  subtle  changes  in  meaning  in  the 
course  of  its  history  as  to  leave  its  modern  signifi- 
cance full  of  dangerous  variations.  The  ordinary 
business  man  uses  the  word  daily  to  convey  half  a 
dozen  or  more  different  ideas  without  recognising 
the  differences.  Scientific  writers  have  waged  long 
and  bitter  controversies  concerning  its  proper  defini- 
tion.1 Without  going  deeply  into  the  controversy, 
we  may  say  that  there  are  practically  three  opposing 
views  as  to  the  real  nature  of  credit.  First,  there 
are  those  writers,  who,  like  Nebenius  and  Rau,  start 
Three  oppos-  from  the  etymological  meaning  of  the 
^th^nature  ^erm  an(^  maintain  that  the  confidence, 
of  credit.  or  trust,  reposed  by  the  creditor  in  the 
ability  of  the  debtor  to  fulfil  an  agreement  'in  the 
future  is  the  chief  element  in  credit.2  Second,  there 
is  a  class  of  writers  who,  like  Knies,  regard  this  ele- 
ment of  confidence,  a  mere  psychical  condition,  as 

1  A  good  idea  of  the  extent  of  the  controversy  and  of  the  con- 
flicting views   can  be  gained  from    Knies,    Der  Kredit,   Berlin, 
1876. 

2  Nebenius,  Der  offentliche  Credit,  Carlsruhe  und  Baden,  2d  ed., 
1829  ;  Rau,  Finanzwissenschaft,  3d  ed.,  Heidelberg,  1851 ;  II.  Abt, 
p.  248. 


CHAP.  I  NATURE  OF  PUBLIC  CREDIT  283 

too  intangible,  too  immaterial,  to  be  of  any  value  for 
a  scientific  definition.  They  proceed  entirely  from 
observation  of  those  transactions  which  are  said  to 
involve  the  use  of  credit,  and  find  in  all  such  trans- 
actions one  feature  which  is  never  present  in  trans- 
actions not  designated  as  credit  transactions.  That 
feature  is  that  the  completion  of  the  transaction  is 
regarded  as  being  postponed  to  a  future  time.  This 
element  of  time,  this  postponement,  must  then,  they 
argue,  be  the  essence  of  credit.  Credit  is,  in  their 
eyes,  merely  a  means  of  transferring  ownership  tem- 
porarily, a  means  of  paying  for  present  goods  with  a 
greater  quantity  of  future  ones.  Third,  there  is 
still  "another  school,  who,  like  McLeod,  regard  credit 
as  analogous  to  money,  money  being  regarded  as 
representing  claims  on  the  wealth  of  the  whole  com- 
munity, while  a  credit  is  a  similar  claim  on  the  wealth 
of  some  particular  individual.  McLeod  even  goes 
so  far  as  to  identify  the  claim,  the  order,  the  promise 
to  pay,  or  the  right  to  demand  with  "the  credit." 
"  A  credit,"  says  McLeod,  "  in  Law,  Commerce,  and 
Economics,  is  the  Right  which  one  Person,  the 
Creditor,  has  to  compel  another  Person,  the  Debtor, 
to  Pay  or  Do  something." 1  Professor  Sherwood  has 
developed  this  in  a  more  scientific  manner. 

1  Theory  of  Credit,  L,  315.  In  a  very  scholarly  article  pub- 
lished in  the  Quarterly  Journal  of  Economics,  January,  1894, 
Professor  Sherwood  discusses  the  nature  and  mechanism  of  credit 
in  a  way  to  throw  a  great  deal  of  new  light  upon  the  subject.  I 
do  not  believe  that  his  analysis  can  be  improved  upon.  He  dis- 
tinguishes particularly  the  credit  basis  of  money,  as  generic  or 


284         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

SEC.  3.  These  definitions,  apparently  so  contra- 
dictory, are  not  altogether  irreconcilable.  They 
Reconciliation  represent  different  points  of  view  rather 
of  these  views.  than  reai  differences  in  meaning.  Cer- 
tainly nothing  but  credit  is  described  by  any  one  of 
the  three  definitions,  and  certainly  there  are  shades 
of  the  meaning  of  the  term  that  are  aptly  described 
by  each  of  them.  As  is  so  often  the  case  when  a 
word  in  common  use  is  defined  for  scientific  pur- 
poses in  several  ways,  we  find  that  one  definition  fits 
certain  classes  of  things  covered  by  the  term  better 
than  others.  There  are  certain  debts^or  example, 
in  which  the  element  of  trust  is  paramount,  others 
in  which  that  of  time  is  more  important,  and  again 
some  in  which  the  element  of  claim  or  demand  is  the 
distinguishing  thing.  But  it  is  also  true  that  there 
are  no  cases  of  the  existence  of  credit  where  all 
three  of  these  features  do  not  appear,  the  one  or  the 
other  varying  in  importance  as  the  case  may  be. 
To  fully  understand  a  thing  so  many-sided  as  credit, 
it  is  necessary  to  examine  it  from  several  points  of 
view. 

If  we  start  from  the  etymological  meaning  of  the 
term  we  cannot  avoid  the  conclusion  that  one  of  the 
chief  elements  of  credit  is  trust.  Certainly  without 

universal  credit  (which  he  calls  "customary  credits"),  from  that 
of  the  commonly  so-called  credit  transactions,  which  he  calls 
"  formal  credits."  It  is  with  the  latter  only  that  we  are  concerned 
here.  They  are  legally  enforcible.  They  rest  in  the  economic 
sense  "  on  a  psychological  trait  of  faith  in  the  uniformity  and 
reasonableness  of  other  men's  voluntary  acts," 


CHAP,  i  NATURE  OF  PUBLIC  CREDIT  285 

that  intangible,  immeasurable  feeling  or  frame  of 
mind  known  as  confidence,  trust,  or  faith,  on 
which  Knies  pours  so  much  scorn,  no  ~ 

Uonfiaence  a 

debts  would  have  come  into  existence,  necessary 
As  Professor  Cohn  well  says,  "Credit  part' 
rests  on  the  development  of  opinions  and  institutions 
which  arise  with  the  general  advance  of  civilisa- 
tion."1 Modern  usage  has  not  yet  eliminated  this 
original  meaning  from  the  term.  It  cannot  be 
altogether  incorrect  to  make  this  a  part  of  the  defi- 
nition. It  is  customary  enough  to  conceive  that 
credit  or  faith  is  reposed  by  the  creditor  in  the 
debtor,  and  that  it  varies  in  amount,  although  never 
exactly  measurable.  But  there  are  many  credit 
transactions  in  which  the  element  of  trust  shrinks 
into  insignificance.  An  advance  on  a  warehouse 
receipt,  a  Lombard  loan,  a  pawn-broker's  advance, 
all  of  these  and  many  like  them  are  credit  transac- 
tions, but  the  element  of  personal  confidence  plays 
little  part  in  these.  The  creditor  in  these  cases 
never  has  to  consider  the  character  of  the  debtor 
nor  his  ability  or  willingness  to  pay.  After  he  has 
satisfied  himself  as  to  the  value  of  the  security,  all 
that  he  has  to  consider  is  the  time  the  Time  also 
debt  has  to  run.  It  must  be  admitted,  essential. 
then,  that  there  are  a  number  of  cases  of  credit 
transactions  in  which  the  paramount  element  is  that 
of  time.  The  first  two  of  the  above-stated  views  of 
the  nature  of  credit  are,  therefore,  reconcilable  in 
1  Grundlegung,  p.  653. 


286         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

this  way.  They  may  be  regarded  as  essentially  the 
same  with  a  difference  in  the  emphasis,  and  it  is 
correct  to  change  the  emphasis  when  different  kinds 
of  debts  are  considered.  Both  of  them  may  be 
covered  by  one  definition,  which  may  for  two  reasons 
be  called  the  subjective  definition:  (1)  Because  it 
takes  into  consideration  feelings,  opinions,  i.e.  trust, 
confidence,  belief.  (2)  Because  it  looks  at  credit 
from  the  natural  point  of  view  of  the  creditor  who 
entertains  that  trust. 

Subjective  Definition.  — From  the  subjective  stand- 
point credit  is  the  confidence  or  trust  reposed  by 
one  person  in  the  ability  of  some  other  person  to 
fulfil  a  promise  at  some  future  time.  The  emphasis 
will  fall  upon  the  feature  of  trust  or  upon  that  of 
time  according  to  the  nature  of  the  particular  debt 
in  point. 

But  that  is  not  all :  we  have  yet  to  dispose  of  that 
view  which  identifies  credit  w_ith  the  claim  which 
the  creditor  has  on  the  debtor.  In  one  aspect  this 
view  seems  absolutely  contradictory  to  that  which 
we  have  adopted.  So  much  so  that  Knies  ridicules 
it,  considering  it  quite  as  absurd  as  the  reasoning  of 
John  Law.  He  says  it  makes  the  debtor  give 
credit  :  i.e.  he  gives  the  claim,  and  the  claim  is 
credit.  But  McLeod's  reasoning  is  not  so  easily 
The  objective  disposed  of .  He  has  taken  what  may  be 
point  of  view.  weu  caued  the  objective  view.  He  has 
sought  out  embodied  credit.  His,  too,  is  the  natu- 
ral point  of  view  of  the  debtor.  The  opposition, 


CHAP.  I  NA  TURE   OF  PUBLIC  CREDIT  287 

therefore,  between  the  two  views  is  more  apparent 
than  real,  and  arises  from  the  fact  that  this  is 
from  a  different  point  of  view.  There  are  two 
sides  to  the  shield.  The  debtor  sells  a  claim, 
which  is  a  more  or  less  tangible  thing  having  a 
present  value,  just  as  many  another  claim  has ; 
as,  for  example,  a  patent  right  or  a  copyright. 
The  debtor  is  concerned  only  with  the  value  of  that 
claim.  The  creditor,  however,  looks  beyond  the 
claim  and  desires  to  know  whether  he  can  trust  in 
the  ability  of  the  debtor  to  make  the  claim  good. 
By  a  very  natural  analogy,  too,  the  language  of 
business  says  that  the  debtor  enjoys  good  or  bad 
credit,  as  though  the  trust  reposed  in  him  by  others, 
in  whose  minds  it  exists,  really  became  an  attribute 
of  him.  There  is  still  more  ground  for  McLeod's 
view,  for,  as  has  already  been  remarked,  it  is  often 
the  nature  of  the  claim  created  that  adds  to,  or  de- 
tracts from,  the  credit.  Any  man  in  ordinary  times 
can  obtain  credit  if  he  comes  prepared  with  collat- 
eral security  and  is  ready  to  create  a  claim  that  is 
good  on  that  in  case  his  other  resources  fail  him. 
It  is  clear,  then,  that  the  view  of  McLeod  is  im- 
portant, and  also  that  it  is  supplementary  to  that 
already  adopted.  It  reveals  many  phases  of  credit 
that  cannot  be  seen  at  all  from  the  subjective  point 
of  view.  The  two  views  taken  together  make  a 
complete  explanation. 

Objective  Definition.  —  From  the  objective  stand- 
point, credit  is  embodied  in  claims  which  are  ac- 


288         INTRODUCTION  TO  PUBLIC  FINANCE     PART  m 

cepted  by  the  creditor  in  payment.  These  objective 
claims  have  a  value  like  every  other  exchangeable 
commodity,  and  are  recorded  in  the  various  "  instru- 
ments of  credit." 

If  these  two  definitions  are  accepted,  we  can  pro- 
ceed to  point  out  wherein  public  credit  differs  from 
Public  credit  ordinary  or  private  credit.  The  pecul- 
differsfrom  ^  conditions  which  distinguish  public 

ordinary 

credit.  credit   from  ordinary  credit  arise  from 

the  fact  that  the  debtor  is  the  State.  The  State, 
being  above  the  law,  cannot  be  compelled,  as  the 
private  individual  can,  to  pay  its  debts.  Public 
credit  is  therefore  subjectively  defined  as  the  confi- 
dence or  trust  reposed  in  the  ability  and  willingness 
of  the  debtor  (the  State)  to  fulfil  its  promises  at  some 
future  time.  Objectively  the  claim  (in  this  case  the 
bond)  shrinks  to  the  character  of  an  unsupported 
although  generally  accepted  promise.  There  are,  to 
be  sure,  some  important  cases  in  which  the  claim  is 
apparently  supported  by  something  more  definite 
than  the- mere  promise  of  the  debtor;  as  for  example, 
when  the  revenues  from  certain  productive  enter- 
prises are  pledged  for  the  support  of  the  debt 
charges.  But  even  in  these  cases,  the  creditor  has 
no  real  resource  against  intentional  bad  faith.  In 
general  the  subjective  standpoint  gives  a  better 
view  of  public  credit  than  the  objective,  because 
the  claims  cannot  be  enforced. 

The  fact  that  the  debtor  is  the  State  has  other 
important  consequences.  (1)  The  State  has  sover- 


CHAP.  I  NA  TURE  OF  PUBLIC  CREDIT  289 

eign  power  and  can  compel  its  subjects  to  lend  to 
it ;  or,  on  the  other  hand,  the  creditor  may  make 
advances  on  rather  poorer  terms  than  he  other  differ- 
would  otherwise  accept,  from  motives  e^£e£^ 
of  patriotism.  (2)  The  debtor  State  and  private. 
lives  forever,  and  hence  can  make  perpetual  debts. 
(3)  Its  affairs  are  all  open  to  inspection,  and  the 
would-be  creditor  has  full  opportunity  to  know  its 
ability  to  pay.  (4)  Public  credit  may  be  divided 
into  various  parts,  according  as  it  is  the  credit  of  the 
central  government  or  of  some  subordinate  depart- 
ment that  is  being  considered.  The  consideration 
of  the  relations  of  the  different  parts  of  the  govern- 
ment in  this  respect  belongs  to  the  field  of  public 
law  rather  than  to  that  of  public  finance. 

SEC.  4.    Public   credit    was    necessarily   later   in 
development  than   private   credit.     General   habits 
of  lending  on  a  large  scale  had  to  be   The  late  de 
established  before  nations  could  borrow,   veiopment  of 
The  bankers  and  brokers  of  the  world  public  credit' 
had  to   develop   the   machinery   for  handling   evi- 
dences of   debt  before  large  public  loans  could  be 
placed.     Then,  too,  inasmuch  as  the  objective  evi- 
dences of  debt  in  the  case  of  the  government  were 
nothing  but  the  unsupported  promises  of  the  gov- 
ernment, confidence  that  these  promises  would  be 
kept  had  to  grow.     At  first  the  assurance  rested  on 
the  honour  of  the  monarch,  or  upon  some  pledge  or 
security  given  by  him,  such  as  the  crown  jewels,  crown 
lands,  a  lease  of  the  revenues,  and  the  like.     But 


290         INTRODUCTION  TO  PUBLIC  FINANCE     PART  m 

later,  as  Bastable  so  ably  shows,1  the  development  of 
public  credit  goes  hand  in  hand  with  the  develop- 
ment of  constitutional  government.  It  would  seem 
that  the  control  of  the  purse  by  the  very  persons 
who  were  to  pay  the  taxes  gave  a  steadiness  and 
security  to  the  financial  administration  that  aroused 
the  confidence  of  money  owners. 

SEC.  5.  Much  attention  has  been  given  by  differ- 
ent authors  to  the  economic  effects  of  public  bor- 
rowing. It  is  now  pretty  well  agreed  that  public 
borrowing  does  not,  as  was  once  taught,2  create  new 
wealth  except  indirectly,  through  the  use  made  of 
the  capital  taken  when  it  is  used  productively. 

Economic  ^or'  O11  ^ne  °^ner  nand.,  does  public  bor- 
effectsofpub-  rowing  in  itself  directly  destroy  wealth. 

lie  borrowing.    The  m()nev  bom)wed  may  be  devoted  to 

some  form  of  rapid  consumption,  as  in  war.  In  this 
case  the  destruction  of  wealth  is  determined  by  the 
line  of  expenditure  decided  upon,  not  by  the  bor- 
rowing merely.  But  the  feasibility  of  obtaining 
large  sums  in  this  way  is  said  to  lead  to  more  ex- 
travagant expenditure  than  would  otherwise  be  in- 
dulged in,  since  taxation  for  such  purposes  would 
be  difficult.  The  consumed  wealth  is  replaced  by 
claims  upon  future  wealth  which  are  not  of  such  a 
character  as  to  be  available  as  productive  capital. 
But  the  loss  incurred  is  distributed  over  many  years 
instead  of  being  concentrated  in  a  few.  As  in  the 

i P.  579. 

2  "  The  public  funds  a  mine  of  gold." 


CHAP.  I  NA  TURE   OF  PUBLIC  CREDIT  291 

case  of  a  spendthrift  who  mortgages  his  patrimony 
for  wasteful  extravagance,  so  in  the  case  of  a  nation 
which  borrows  for  war,  the  evil  that  arises  is  from 
the  waste,  not  from  the  borrowing.  For  the  State 
to  borrow  for  a  productive  purpose  has  no  other 
economic  effect  than  for  a  private  corporation  to  do 
the  same. 

SEC.  6.  There  has  also  been  some  discussion  of 
the  relative  merits  of  domestic  and  foreign  loans, 
and  their  differing  economic  effects.  NO  serious  dif- 
Sometimes  it  has  been  claimed  that  for-  f^ence  in  the 

i          i  j-  j.      ^  £   effects  of  for- 

eign loans   involve   less    disturbance   of  €ign  or  domes- 


domestic  industry.  The  intimate  rela- 
tion  ftxistu^g*  between  modern^Figtlons  in  their  com- 
m^r^jal  and  industrial  er>t.p.rpris^«  dpafrnya  to-day 
almost  al^JJae-sigmncance  that  might  formerly  have 
attached  to.  such  a  discussion.  The  payment  of  the 
French  indemnity  of  5,000,000,000  francs  to  Germany 
after  the  war  of  1870  was  carried  out  in  twenty- 
seven  months,  and  not  one  single  serious  difficulty 
or  disorder  in  the  financial  centres  was  produced 
by  it.1  So  great  is  the  mobility  of  modern  capi- 
tal and  so  vast  are  the  current  transactions,  that  all 
of  this  money  could  be  easily  turned  into  the  same 
stream  without  disturbing  its  placid  surface. 

Public  credit  is  a  plant  of  slow  growth;  more  than 
that  it  is  a  delicate  plant.  It  may  be  The  frailty  of 
injured  beyond  recovery  by  a  single  case  public  credit. 
of  failure  to  fulfil  the  promise  in  which  it  found 

1  Blackwood's  Edinburgh  Magazine,  Feb.,  1875,  pp.  172-187. 


292         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

expression.  Many  of  the  commonwealths  of  the 
United  States  have  repudiated  their  debts,  and  have 
since  then  recovered  their  power  to  borrow  but 
slowly,  and  in  some  instances  scarcely  at  all.1  Weak 
nations  which  may  be  or  have  been  coerced  by 
stronger  and  wealthier  nations  in  the  interest  of 
citizens  of  the  latter  who  were  creditors  of  the 
former,  generally  borrow  more  easily  than  stronger 
independent  nations,  or  parts  of  strong  confedera- 
tions, which  have  failed  to  meet  their  obligations 
and  cannot  be  coerced. 

The  credit  of  local  governing  bodies  depends  in 
great  measure  upon  their  powers  and  duties  in 
public  law.  Generally  speaking,  a  "municipal  cor- 
poration," when  acting  legally  within  the  sphere 
prescribed  to  it,  is  like  a  private  company ;  —  its 
obligations  can  be  enforced  by  legal  or  judicial  pro- 
cedure. Unlike  the  sovereign  State,  a  municipality 
can  be  sued  without  its  consent.  Only  with  the 
positive  sanction  of  the  sovereign  State  can  a  munici- 
pality default  and  escape  punishment  therefor. 

1  Under  the  Eleventh  Amendment  to  the  Federal  Constitution, 
a  State  cannot  be  sued  in  a  federal  court.  This  is  contrary  to  the 
original  intention  of  the  constitution.  See  my  monograph,  Das 
Kreditwesen  der  Staaten  und  Stddte  der  Nordamerikanischen 
Union  in  seiner  historischen  Entwickelung,  Jena,  1891.  Egypt  is 
a  good  example  of  foreign  coercion  to  enforce  debt  payment. 


CHAP.  II  FORMS  OF  PUBLIC  DEBTS  293 


CHAPTER   II 

FORMS   OF  PUBLIC   DEBTS 

SECTION  1.  Governments  may  borrow  money  in 
almost  any  of  the  ways  which  an  individual  may 
use.  These  different  forms  can  be  best  classification 
made  clear  in  connection  with  their  clas-  should  sh°w 

the  credit  up- 

sification.     The  principles  upon  which  a  on  which  each 
correct  classification  should  be  built  are  deforests. 
those  developed  in  the  preceding  chapter.     Public 
debts  are  forms  of  public  credit,  and  the  kind  of 
credit  upon  which  each  dett  is  based  should  be  shown 
in  the  classification.     Some  light  can  be  thrown  on 
the  different  forms  of  debt  by  a  review  of  the  older 
classifications.     One  of  the  commonest  distinctions 
is  that  between  funded  and  floating  debts.     Orig- 
inally this  distinction  was  very  simple,  and  corre- 
spondingly useful.     In  the  words  of  Adam  Smith : 
"Nations,  like   private  men,  have  gen-  Fundedand 
erally  begun  to  borrow  upon  what  may  unfunded 
be  called  personal  credit,  without  assign- 
ing or  mortgaging  any  particular  fund  for  the  pay- 
ment of  the  debt ;  and  when  this  resource  has  failed 
them,  they  have  gone  on  to  borrow  upon  assignments 
or   mortgages   of   particular   funds."     The   first   of 
these  is  the  unfunded  debt,  the  other  is  the  funded 


294         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

debt.1  But  although  these  terms  are  still  in  com- 
mon  use,  the  meaning  attributed  to  them  has  so 
entirely  changed,  that  to-day  the  so-called  floating 
or  unfunded  debt  consists,  in  large  part,  of  out- 
standing claims  upon  very  definite  revenues,  while 
it  is  often  the  case  that  no  particular  fund  or  source 
of  revenue  is  directly  pledged  for  the  payment  of 
the  so-called  funded  debt.  Hence  it  is  that  Pro- 
fessor Cohn  treats  Smith's  grounds  of  distinction  as 
antiquated,  and  says  *  that  the  real  distinction  is 
found  in  the  fact  thsrt  the  funded  debts  are  those 

• 

of  longer  duration,  and  the  floating  debts  those  of 
shorter  duration,  "/although,"  he  adds,  "different 
causes  and  purposes  of  credit  lie  behind  the  differ- 
ence in  duration."2  The  most  elaborate  attempt 
Wagner's  *°  explain  the  modern  uses  of  these 
distinctions,  terms  is  that  of  Wagner.  As  it  is  so 
complete,  it  is  well  worth  summarising  here.  Funded 
and  floating  debts  can  be  distinguished  by  the  fol- 
lowing characteristics,  which  are  more  or  less  clearly 
recognisable  in  the  different  cases  :  (1)  The  purpose 
of  the  loan  —  floating  debts  are  generally  for  rapidly 
passing  needs,  especially  for  the  payment  of  the 
current  dues  of  the  treasury ;  funded  debts  are  to 
supply  the  capital  for  permanent  needs  of  the  civic 
household  ;  (2)  continuance  of  the  debt  —  together 
with  the  former  characteristic,  relatively  shorter 
continuance  of  floating  debts,  at  least  in  intention  ; 

1  Wealth  of  Nations,  V.,  III. 

2  Finanzwissenschaft,  p.  767. 


CHAP,  ii  FORMS  OF  PUBLIC  DEBTS  295 

longer  continuance  of  funded ;  (3)  the  legal  con- 
ditions of  repayment  —  in  the  case  of  floating  debts 
the  different  items  are  repayable  at  sight  or  within 
a  comparatively  short  period ;  in  that  of  the  funded, 
the  creditor  has  a  more  limited  control  over  the 
principal,  the  debtor  (the  State)  being  bound  to  re- 
payment according  to  a  fixed  plan  for  amortisation, 
or  making  no  agreement  as  to  the  repayment  of  the 
principal.  This  last  is  regarded  as  the  essential 
test.1 

The  difficulty  found  in  drawing  a  sharp  line  be- 
tween these  two  classes  arises  from  the  fact  that  the 
distinction  is  at  best  purely  an  arbitrary  one.  It 
may  differ  from  State  to  State,  or  from  time  to  time 
in  the  same  State,  according  to  the  temporary  whim 
of  the  public  official  or  statistician.  The  terms  are 
relative  ones.  By  a  floating  debt  is  generally  meant 
one  that  is  regarded  by  the  person  using  the  term 
as  a  temporary  one.  One  official  will  call  any  debt 
temporary,  or  a  floating  debt,  which  has  three,  five, 
or  even  ten  years  to  run ;  while  another  will  refuse 
the  term  to  any  debt  that  is  to  run  longer  than 
six  months  or  a  year.  Strictly  speaking,  the  term 
floating  debt  ought  never  to  be  applied  to  any 

1  Most  writers  make  use  of  these  terms  ;  few  have  defined  them 
so  accurately  as  Wagner.  For  example  :  Adams,  Public  Debts, 
p.  147,  concedes  the  term  floating  debt  only  to  those  in  which  the 
government  retains  the  right  to  investigate  each  particular  claim. 
This  necessitates  a  new  class  of  "temporary  debts,"  consisting  of 
treasurer's  notes,  bills  of  exchequer,  and  the  like.  Nothing  would 
seem  to  be  gained  by  this  distinction. 


296         INTRODUCTION  TO  PUBLIC  FINANCE    PART  in 

debt  that  is,  on  the  face  of  it,  to  run  beyond 
the  end  of  the  fiscal  year  next  succeeding  that  in 
which  it  is  created.  But  there  is  no  established 
custom  for  such  a  limitation.  In  trying  to  draw  a 
sharp  line  between  these  two  classes  we  meet  with 
the  same  difficulty  that  we  met  in  attempting  to  dis- 
tinguish between  direct  and  indirect  taxes.  But  we 
have  even  less  to  go  upon.  Official,  statutory,  and 
scientific  usage  varies  so  much  that  nothing  is  gained 
by  attempting  to  collate  all  the  meanings.  Even 
for  the  most  general  scientific  purposes,  therefore, 
these  terms  are  of  little  value,  and  for  the  purposes 
of  classification  the  distinction  is  absolutely  useless. 
SEC.  2.  There  are  two,  and  only  two,  ways  in 
which  a  State  may  borrow.  It  may  compel  persons 

tO  lend    tO  ^   OI   {t   ma      °ffer  termS   tO 


Forced  loans 

and  contract-  which  persons  agree.  The  first  of  these 
will  be  called,  for  convenience,  forced 
loans;  the  second  contractual.1  This  distinction  into 
two  classes  according  to  the  motives  appealed  to  is 
primary.  The  first  class  consists  of  loans  that  are 
now  comparatively  unimportant  and  rare.  They 
were  once  very  common.2  Few  nations  now  have 

1  Leroy-Beaulieu,  Adams,  and  Bastable  make  use  of  a  third  class 
called  "patriotic"  loans.    They  have  three  classes,  forced,  patri- 
otic, and  "  voluntary."     The  need  of  this  second  class  is  not  clear. 
The  patriot  differs  from  the  other  creditors  only  in  that  he  accepts 
worse  terms,  or  apparently  such.    Unless  he  waive  all  claim  to 
repayment,  in  which  case  there  is  no  debt,  his  loan  differs  from 
those  of  the  third  class  only  in  that  it  is  even  more  "  voluntary." 

2  See  Roscher,  §  132, 


CHAP,  ii  FORMS  OF  PUBLIC  DEBTS  297 

resort  to  forced  loans,  even  to  the  limited  extent  of 
paying  their  current  expenses  in  bonds,  compelling 
persons  having  claims  to  accept  them.  There  is  a 
quasi-forced  loan  that  is  of  some  interest.  That  is 
the  use  of  irredeemable  paper  money,  irredeemable 
This  is  very  commonly  spoken  of  as  a  paper  money. 
forced  loan.  It  must  be  observed,  however,  that  it 
is  a  loan  only  when  the  government  making  such 
issues,  directly  or  indirectly,  promises  to  redeem  the 
notes  at  some  future  time.  Otherwise  no  debt  has 
been  created.  When  such  money  is  issued  with  the 
purpose  of  retaining  it  in  circulation  permanently,  it 
is  not,  in  intention  at  least,  a  debt ;  but  it  is  a  form 
of  forced  payment  more  akin  to  a  tax.  Even  when 
there  is  a  promise  to  redeem  the  money  at  some 
future  time,  this  forced  loan  shows  few  of  the  funda- 
mental features  of  a  debt.  Every  debt  involves  the 
use  of  credit.1  Now  from  the  subjective  side  there 
is  little  or  no  credit  involved  in  this  case.  The 
trust  or  confidence  amounts  to  nothing  more  than  a 
belief  in  the  stability  of  the  government  and  a  readi- 
ness to  obey  its  authority.  From  the  objective  side 
the  creditor,  if  we  may  call  him  such,  receives  a 
claim  that  is  satisfiable  not  from  the  goods  of  the 
debtor  as  in  other  cases,  but  from  the  goods  of  the 
community,  and  that  by  law.  Unlike  money  of 
"  final  redemption "  these  notes  cannot  properly 
be  said  to  be  based  even  upon  customary  credit. 
From  both  points  of  view,  then,  these  so-called 
1  Formal  credit,  to  use  Professor  Sherwood's  term ;  see  note,  p.  283. 


298         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 


forced  loans  are  scarcely  more  than  quasi-debts. 
They  are  also  quasi-taxes.  Dietzel  maintained  that 
these  loans  were  merely  taxes. 

SEC.  3.  Among  the  contractual  debts  the  first 
thing  that  strikes  us  is  that  certain  of  the  contracts 
contain  features  especially  intended  to  add  to  or 
ensure  the  confidence  of  the  creditor,  while  in  others 
there  is  little  or  nothing  looking  to  that  end. 
This  at  once  suggests  two  natural  subdivisions  of 
,  contractual  debts.  On  the  objective  side 

Divisions  of  J 

contractual  the  first  class  consists  of  claims  good  (1) 
upon  particular  funds,  or  (2)  upon  par- 
ticular revenues  or  the  revenues  of  a  particular 
period,  or  (3)  upon  certain  definite  portions  of  the 
general  revenue  permanently  set  aside  to  meet  them. 
These  three  bases  for  the  claims  suggest  three  natu- 
ral subdivisions  of  the  first  class.  Of  these  three 
again,  the  second,  consisting  of  those  claims  which 
bear  upon^  certain  definite  revenues,  may  be  most 
conveniently  analysed  according  to  the  classification 
that  was  adopted  for  public  revenues. 

The  most  important  element  of  those  debts,  the 
contracts  for -which  contain  no  provisions  directly 
intended  to  ensure  the  confidence  of  would-be  cred- 
itors, is  the  length  of  time  that  the  debt  has  to  run, 
or  what  is  much  the  same  thing,  the  relative  size  of 
the  demands  made  thereby  on  the  general  revenue. 
Here  we  find  that  certain  contracts  call  (1)  for  the 
repayment  of  the  principal  only,  some  (2)  for  the 
payment  of  principal  and  interest,  while  others 


CHAP.  II  FORMS  OF  PUBLIC  DEBTS  299 

(3)  call  for  the  payment  of  interest  only.  To 
shorten  the  matter  the  whole  classification  will  now 
be  presented  in  the  form  of  a  table.  The  names  of 
the  classes  are  generally  self-explanatory,  but  in 
some  cases,  for  clearness'  sake,  a  concrete  or  a  gen- 
eral example  is  appended. 

I.  FORCED  DEBTS  :    (Now  mostly  obsolete.     Akin 

thereto  are  the  quasi-debts  in  the  form  of  irre- 
deemable paper  money.) 

II.  CONTRACTUAL  DEBTS  : 

A.  The  contracts  for  which  contain  provisions 
directly  intended  or  calculated  to  ensure 
additional  confidence.  Such  confidence  rest- 
ing : 

1.    On  the  fact  that  the  sums  received  from 
the  creditor  are  not  expended  but  are 
retained  to  meet  the  debt  charges. 
These  are  of  two  kinds  : 

a.  Voluntary  deposits  : 

1)  Without  interest.     Ex.  Post-of- 
fice orders. 

2)  With  interest.     Ex.  Deposits  in 

public  banks,  etc. 

3)  Insurance  (not  compulsory). 

b.  Statutory  deposits  : 

1)  Guarantee  funds  of  various  kinds, 
with   and  without   interest.     Ex. 
Deposits   by  insurance  companies 
to  protect  policy  holders,  etc. 

2)  Insurance  (compulsory). 


300         INTRODUCTION  TO  PUBLIC  FINANCE    PART  in 

3)  Deposits  of   coin   or   bullion  to 
secure     circulating     notes.       Ex. 
United    States    silver    and    gold 
certificates. 

4)  Estates  in  hands    of   the  courts 
pending  litigation. 

2.  On  the  fact  that  definitely  specified 
revenues  are  set  aside  for  the  payment 
of  the  debt  (subdivided  according  to 
the  classification  of  revenues). 

a.  Based  generally  on  the  revenues  of  a 
definite  period.     Debts  contracted  in 
anticipation  of   the   revenues.     Ex- 
chequer bills  and  redeemable  notes. 

b.  Based  on  prices.     Ex.  Money  bor- 
rowed for  the  establishment  of  some 
productive  enterprises  carried  on  in 
competition  with  private  enterprises 
of  the  same  character. 

c.  Based  on  fees.    Ex.  Municipal  bonds 
for  water- works. 

d.  Based  on  special  taxes  : 

1)  By  the  method  of  farming  taxes 
(now  obsolete). 

2)  By  appropriating  special  taxes, 
(or  a  percentage  of  all  taxes) 
and  putting  the  funds  thus  re- 
ceived into  the  hands  of  trus- 
tees, for  the  payment  of  the  debt. 

B.    Where  confidence  is  so  assured    that    no 


CHAP,  ii  FORMS  OF  PUBLIC  DEBTS  301 

special  means  are  taken  to  arouse  it.     Clas- 
sified according  to  the  thing  promised  : 

1.  Principal  only.     Ex.  Redeemable  notes 
(money)  not  legal  tender,  and  not  as- 
sured by  any  deposit. 

2.  Principal  and  interest  : 

a.  Bonds  sold  in  the  market  for  what 

they  will  bring,  and  bearing  a  fixed 
rate  of  interest,  payable  at  a  set 
time  or  in  instalments. 

b.  Annuities,  terminable  at  the  end  of 

a  definite  or  indefinite  period,  as  a 
term  of  years  or  a  life,  so  calculated 
that  at  the  end  of  the  period  the 
amount  paid  shall  equal  the  princi- 
pal and  interest.  These  may  be  in 
many  different  forms;  they  may  be 
arranged  in  the  form  of  life  an- 
nuities, of  pensions,  of  lotteries,  or 
in  that  of  tontines  and  the  like. 

3.  Interest  only : 

a.  "  Perpetual    bonds,"   in    the   case   of 

which  the  creditor  has  no  right  to 
demand  the  payment  of  the  bond 
within  any  definite  period,  but  the 
government  may  generally,  after  a 
fixed  time  has  elapsed,  redeem  the 
bonds  for  a  stated  sum. 

b.  Permanent  annuities. 

SEC.  4.    In  the  great  majority  of  cases  in  modern 


302         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

times,  the  leading  nations  are  able  to  borrow  with- 
out particular  reference  to  any  special  means  of 
arousing  confidence.  The  long  period  through 
which  they  have  faithfully  fulfilled  all  their  obli- 
gations has  so  thoroughly  established  their  credit 
Means  of  ^na^  their  bonds  stand  among  the  best 
alluring  cred-  securities  on  the  market.  The  only 
changes  that  can  be  made  in  these  debts 
are  such  as  are  intended  to  make  the  annual  burden 
as  small  as  possible.  Some  of  the  things  desired  by 
creditors,  and  which,  while  not  affecting  the  credit 
of  the  borrowing  State,  yet  add  to  the  readiness  with 
which  the  bonds  sell,  are  (1)  that  the  debt  shall  not 
be  redeemed  arbitrarily  for  a  capital  sum  which 
would  not  yield,  at  the  market  rate  of  interest,  the 
same  annual  income  as  the  bond ;  (2)  that  any 
chance  gains  that  may  arise,  as  from  a  fall  in  the 
market  rate  of  interest,  may  for  a  time  at  least 
accrue  definitely  to  the  holder. 

By  far  the  larger  part  of  European  debts  consist 
of  the  so-called  "perpetual"  bonds.  These  bonds, 
"Perpetual"  which  generally  name  a  certain  capital 
bonds.  sum  at  which  they  may  be  redeemed, 

contain  no  date  at  which  they  mature.  They  are 
redeemable  whenever  the  debtor  (the  State)  chooses, 
subject  in  some  instances  to  certain  limitations  for 
the  greater  security  of  the  lender.  For  example, 
the  publication  of  notice  of  intention  to  redeem  or 
promise  not  to  redeem  for  a  certain  period.  These 
"  perpetual "  bonds  are  for  both  parties  a  very  con- 


CHAP,  ii  FORMS  OF  PUBLIC  DEBTS  303 

venient  form.  What  they  amount  to  is  that  the 
State  sells  an  annuity  for  what  it  will  bring,  with  the 
privilege  of  redeeming  it  at  any  time  for  a  certain 
sum,  but  it  cannot  be  compelled  to  redeem  it  at  any 
inconvenient  time.  The  creditor,  owing  to  the  pub- 
lication which  to-day  attends  all  public  affairs,  knows 
what  provisions  can  be  made  for  the  repayment,  and 
consequently  knows  approximately  how  long  his 
annuity  will  run.  He  can,  moreover,  easily  dispose 
of  it  through  the  stock  market  if  he  should  need 
the  money  for  other  purposes. 

This  form  was  once  used  in  the  United  States,  but 
traditions  of  rapid  payment  led  to  the  adoption  of 
different  forms.1  The  first  debts  of  the  v  ,  ,  , . 

JLarly  debts 

United  States  had  been  made  in  the  of  the  United 
form  of  simple  perpetual  bonds  with  no 
limits.  The  debts  created  after  the  War  of  1812 
were  also  of  that  variety,  with  a  limit  of  time  set 
within  which  it  was  promised  not  to  redeem  them. 
But  the  variation  just  referred  to  was  introduced  in 
1862.  This  form  has  been  called  the  "limited 
option  "  debt.  The  bonds  were  "  redeemable  at  the 
pleasure  of  the  United  States  after  five  years,  and 
payable  twenty  years  from  date "  of  issue.  They 
were  called  "five-twenties."  A  similar  plan  was 
followed  in  the  so-called  "  ten-forties."  The  only  ad- 
vantage gained  by  thus  fixing  a  limit  at  which  the 
creditor  is  to  expect  the  payment,  is  that  the  fiscal 
officers  may  have  a  definite  goal  toward  which  to 
1  See  Adams,  Public  Debts,  p.  162. 


304         INTRODUCTION  TO  PUBLIC  FINANCE     PART  m 

work.  If  a  terrain  is  set,  it  is  easy  to  urge  the 
extinction  of  the  debt  at  or  before  that  time,  and 
consequently  the  adoption  of  special  means  and 
efforts  toward  that  end. 

SEC.  5.  Next  in  bulk  are  the  "  terminable  "  annu- 
ities. These  may  be  terminable  at  the  end  of  a 
Terminable  certain  period  or  at  the  death  of  the 
annuities.  holder.  Life  annuities,  both  upon  indi- 
vidual lives  and  upon  the  tontine  plan,1  are  old 
favourites.  But  as  forms  of  original  loans  they  are 
giving  way  to  the  perpetual  bonds.  Life  and  other 
terminable  annuities  have  the  advantage  of  afford- 
ing an  easy  means  of  debt  payment;  and  in  this 
respect,  on  account  of  the  accurate  knowledge  of  the 
amount  to  be  paid,  those  terminating  at  a  definite 
time  are  the  preferable.  But  inasmuch  as  the  an- 
nual payments  must  be  larger  than  the  interest  by 
an  amount  calculated  to  equal  the  principal  or  cost 
at  the  termination  of  the  period,  these  annuities 
impose  a  heavier  constant  burden  upon  the  taxes. 
In  the  case  of  perpetual  bonds  no  provision  is  obliga- 
torily made  for  amortisation,  and  consequently  the 
fiscus  has  better  control  over  the  expenditure  for 
this  purpose.  At  a  time  of  great  pressure  on  the 
revenues  the  perpetual  bonds  offer  a  better  means  of 
raising  money  than  the  terminable  annuities,  inas- 

1  This  plan,  now  made  familiar  again  by  its  adaptation  to  life- 
insurance  business,  is  to  make  over  in  succession  to  the  surviving 
members  of  a  group  of  annuitants  the  shares  of  the  members  who 
die.  The  last  survivor  gets  the  whole  amount,  until  his  death 
closes  the  account. 


CHAP.  II  FORMS  OF  PUBLIC  DEBTS  305 

much  as  they  will  impose  a  smaller  burden  for  the 
time  being.  But  when  the  difficulty  is  over,  it  is  not 
infrequently  the  practice  to  turn  some  portion  of  the 
debt  into  the  form  of  terminable  annuities,  as  that 
imposes  upon  future  officials  a  fixed  policy  of  debt 
payment.  The  investing  public  finds  little  or  no 
absolute  advantage  in  this  form,  for  it  is  relatively 
hard  to  save  up  the  principal  again,  coming  as  it 
does  in  driblets,  and  the  salable  value  of  the  secur- 
ity decreases  continually,  so  that  the  command  over 
the  remaining  portion  of  the  principal  is  never 
good. 

SEC.  6.  Another  favourite  European  form  is  that 
of  lottery  loans.  A  somewhat  lower  rate  of  interest 
on  the  loan  is  offered  than  would  other- 
wise be  accepted,  and  the  balance  of  the 
amount  is  divided  among  the  holders  of  the  secur- 
ities on  the  lottery  plan.  Inasmuch  as  this  is  in- 
tended to  appeal  to  the  general  love  of  gambling,  the 
bonds  are  for  small  amounts,  and  are  sold  to  the 
people.  The  plans  for  determining  the  disposition 
of  the  winnings  of  the  lottery  are  varied.  A  com- 
bination of  the  annuity  loan  with  the  lottery  loan 
is  made  when  the  State  agrees  to  pay  a  certain  pro- 
portion of  the  debt  each  year,  the  determination  of 
which  portion  of  the  debt,  or  of  which  particular 
bonds,  will  be  paid  being  made  by  drawings. 

SEC.  7.  In  all  of  these  forms  of  debt-making  the 
chief  problem  of  the  practical  financier  is  to  fix  the 
rate  of  interest  as  near  as  possible  to  the  market 


306         INTRODUCTION  TO  PUBLIC  FINANCE    PART  in 

rate.  It  is  best  that  it  should  not  be  below  the 
market  rate,  for  in  that  case  the  bonds  will  sell  for 
Fixing  the  IGSS  than  par,  and  the  government  will 
rateof  interest.  have  to  pay  back  a  larger  sum  than  it 
receives.  This  addition  is  accumulated  and  com- 
pounded interest,  which  it  would,  presumably,  have 
been  easier  to  pay  in  annual  instalments  than  at 
one  time.  The  amount  of  the  discount  at  which  the 
bonds  will  sell  depends  on  the  length  of  time  that 
they  have  to  run. 

When  the  market  rate  of  interest  falls,  as  it  gen- 
erally does  in  time  of  peace,  below  that  at  which  the 
debt  was  contracted,  it  is  generally  desirable  to 
reduce  the  rate  of  interest  on  the  debt.  If,  there- 
fore, the  government  can  call  in  its  bonds,  it  goes 
through  the  process  of  refunding;  that  is,  it  issues 
new  bonds  at  the  new  rate  of  interest  and  pays  off 
the  old  with  the  proceeds.  This  advantage  is 
peculiar  to  the  perpetual  bonds,  and  is  consequently 
made  use  of  whenever  the  rate  of  interest  falls, 
which  fact  can  be  ascertained  from  the  quotations  of 
the  bonds  on  the  stock  market. 

SEC.  8.  Perhaps  next  in  importance  to  the  great 
categories  of  debts  we  have  been  discussing  are 
Debts  of  the  those  included  in  the  classification  as 
treasury.  based  upon  specified  revenues  (II.  A.  2). 
Of  these,  only  those  based  upon  the  revenues  of  a 
definite  period  are  common  in  national  financiering. 
Most  of  the  others,  however,  are  common  in  local 
and  municipal  finances.  Inasmuch  as  taxes  are 


CHAP,  ii  FORMS  OF  PUBLIC  DEBTS  307 

payable  only  at  certain  times  of  the  year,  generally 
only  once  or  twice,  while  the  expenses  run  on 
through  the  whole  year,  there  will  necessarily  be 
times  when  the  treasury  owes  more  than  it  has  on 
hand.  Some  of  these  debts  will  be  bills  of  account; 
others  will  be  represented  by  notes  of  various  kinds 
which  the  treasurer  uses  to  pay  bills  with  or  dis- 
counts to  obtain  money.  The  latter,  called  "ex- 
chequer bills,"  "treasury  notes,"  and  the  like,  are 
generally  willingly  accepted,  and  often  pass  freely 
from  hand  to  hand.  They  bear  interest  at  the  low- 
est market  rate.1  They  are  properly  regarded  as 
debts  of  the  treasury  rather  than  debts  of  the  gov- 
ernment, and  are  payable  out  of  the  next  incoming 
revenues.  These  bills  may  swell  to  large  amounts 
in  times  of  sudden  pressure  on  the  finances,  or,  they 
may  be  carelessly  allowed  to  accumulate  year  by 
year,  until  they  must  be  funded,  or,  perhaps,  included 
in  some  general  refunding  or  consolidation  act. 

SEC.  9.    Borrowing  to  secure  the  means  for  enter-— • — " 
ing  upon   some   productive   enterprise  is  the  chief 
cause  of  the  debts  of  local  governments,   productive 
Cities   borrow  to  build  water- works,  to  loans- 
construct  street  railroads,  to  establish  a  gas  or  light- 
ing plant,  etc.     In  the  United  States  the  different 
commonwealths  have  borrowed  to  aid  in  the  con- 
struction of   railroads,  or  to  establish  banks.     The 
enterprise   in   which  the   funds   thus  acquired   are 

1  In  1894-95  English  exchequer  bills  for  March  bore  interest  at 
the  rate  of  1*  and  1  per  cent.    June  bills,  2|  and  \\  per  cent. 


308         INTRODUCTION  TO  PUBLIC  FINANCE     PART  m 

invested  furnishes  an  additional  security  to  the 
loan,  and  enhances  the  credit  of  the  local  body, 
because  it  is  supposed  that  the  enterprise  itself  will 
yield  the  interest  and  other  debt  charges.  There 
are  two  ways  of  managing  such  enterprises.  One  is 
by  selling  the  commodity  or  service  produced;  the 
other  is  by  the  assessment  of  a  fee  upon  the  users. 
So  far  as  the  debt  is  concerned  there  is  little  differ- 
ence in  these  two  methods.  The  former,  however, 
introduces  a  speculative  element,  while  the  latter  is 
more  regular  in  its  returns.  Sometimes  such  enter- 
prises fail,  and  the  interest  has  to  be  paid  out  of  the 
revenue  from  taxation.  Not  infrequently  debts  are 
made  of  this  same  kind  to  render  assistance  to 
private  companies,  and  the  expectation  is  that  the 
companies  will  meet  the  interest  charges.  The  bulk 
of  local  debts  the  world  over  are  of  this  general 
character. 

National  governments,  too,  have  sometimes  con- 
tracted debts  of  this  sort.  Thus  Prussia's  debt  was 
National  in-  almost  all  incurred  for  the  purchase  of 
vested  debts,  railroads,  which  pay  the  interest  and  pro- 
vide for  the  sinking  fund.  Other  countries  of 
Europe  have  similar  "  invested  "  debts.  The  United 
States  has  given  aid  to  railroads,  but  on  terms  that 
give  no  real  surety  that  the  debt  charges  will  ever 
be  met  by  the  roads.  The  wisdom  of  such  loans 
depends  solely  on  the  wisdom  of  entering  upon  such 
enterprises.  It  may  even  be  wise  under  certain  cir- 
cumstances to  advance  money  borrowed  in  this  way 


CHAP,  ii  FORMS  OF  PUBLIC  DEBTS  309 

to  private  companies  which  promise  to  provide 
some  much-needed  facilities,  even  without  any  hope 
that  the  interest  and  debt  charges  will  be  met  in 
any  other  way  than  by  taxation.  That  such  debts 
when  contracted  should  be  treated  in  the  same 
manner  as  any  other  debts,  and  paid  as  soon  as  pos- 
sible, is  a  matter  of  good  business  management. 
The  failure  of  the  assisted  private  enterprise  to 
make  good  the  sums  expended  is  no  reason  for  the 
refusal  of  the  government  to  meet  the  obligations 
thus  incurred,  and  refusal  under  such  circumstances 
is  as  destructive  of  credit  as  would  be  the  failure  to 
meet  any  other  obligation. 

The  nature  of  all  the  remaining  forms  of  debt  is 
clear  from  their  names  in  the  table.  A  good  many 
of  them  are  merely  formal  in  character  and  are 
incurred  in  carrying  out  some  of  the  regular  proc- 
esses of  business  or  law.  Such  debts  are  never 
included  in  the  sum  total  of  the  burden  of  debt, 
because  the  sums  out  of  which  they  are  to  be  met 
are  received  when  the  debt  is  contracted  and  re- 
tained until  the  debt  is  due.  They  are  never, 
except  in  the  case  of  the  grossest  mismanagement, 
a  burden  on  the  revenues. 

These  different  forms  of  debts  are  all  in  constant 
use,  and  the  indebtedness  of  any  nation  will  show 
almost  all  of  them.     The  experience  of  A  system  of 
the   most  advanced  nations  shows  that  public  debts. 
there  is  as  much  need  of  a  systematic  arrangement 
of  the  different  forms  of  debts  as  there  is  of  the  dif- 


310          INTRODUCTION  TO  PUBLIC  FINANCE    PART  m 

ferent  forms  of  taxes.  The  various  kinds  of  stocks 
are  adapted  to  the  differing  needs  of  the  treasury 
and  the  tastes  of  the  lenders.  The  former  must  be 
consulted,  perforce;  the  latter,  if  it  is  desired  to 
obtain  the  most  favourable  terms;  hence  the  scope 
for  the  exercise  of  good  judgment  on  the  part  of 
the  fiscus  in  the  choice  of  forms. 


CHAP,  in  PAYMENT  OF  INTEREST  311 


CHAPTER  III 

NEGOTIATION,  PAYMENT   OF  INTEREST,  CONVERSION, 
AND  REDEMPTION   OF   DEBT 

SECTION  1.  There  are  practically  two  methods  for 
the  negotiation  of  a  public  loan.  One  is  to  prepare 
the  bonds  or  other  evidences  of  debt  for  „, 

1  wo  methods 

sale,  fixing  all  the  conditions  and  offer-  of  negotiating 
ing  them  to  all  comers  who  will  accept  a  loan' 
those  conditions.  The  other  is  to  determine  the 
amount  to  be  raised,  and  then  to  negotiate  with 
bankers  or  capitalists  or  other  persons  in  order  to 
ascertain  on  what  terms  the  sum  can  be  raised. 
There  are,  of  course,  many  variations  of  these  plans, 
but  these  are  the  principal  ones.  In  the  first  case 
the  State  loses  in  a  measure  the  advantage  of  com- 
petition between  the  lenders.  One  of  the  best 
examples  of  this  method  is  the  so-called  "popular 
subscription."  For  example,  a  State  decides  to  issue 
a  certain  number  of  bonds  at  a  fixed  rate  of  interest, 
selling  them  to  all  comers  at  a  stated  price.  Cer- 
tain places  are  designated  for  the  reception  of  sub- 
scriptions. If  the  terms  offered  are  too  low,  i.e. 
offer  too  little  advantage  to  the  purchasers,  only  a 
part  of  the  loan  will  be  taken  up.  If  they  are  too 
high,  the  State,  of  course,  suffers  a  loss.  In  this  case 


312         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

everything  depends  on  the  ability  of  the  fiscal  officers 
to  gauge  the  market.  This  task  is  comparatively 
easy  if  the  State  already  has  a  large  number  of 
stocks  outstanding,  the  market  price  of  which  will 
roughly  indicate  the  possible  rate  of  interest  that 
will  be  accepted  on  a  public  loan.  But  the  extent 
to  which  the  new  loan  will  probably  depress  the 
market  will  have  to  be  considered. 

If  the  second  method  be  the  one  chosen,  the  State 
lets  it  be  known  that  bids  for  a  certain  sum  are 
desired.  The  bankers  and  capitalists,  and  sometimes 
the  public  at  large,  then  compete  for  the  privilege 
of  taking  either  the  whole  issue  or  a  part  of  it. 
The  different  bankers  offer  to  provide  the  whole  or 
a  part  of  the  money  needed  at  a  certain  rate  of 
interest,  or  if  the  face  of  the  bonds  and  the  rate  of 
interest  have  been  fixed,  offer  to  buy  the  stocks  at  a 
certain  rate,  generally  quoted  as  so  much  per  hun- 
dred. The  most  favourable  terms  offered  by  reli- 
able bidders  are  then  accepted,  and  they  deliver  the 
money  in  mass  or  in  instalments  to  the  treasury,  in 
such  form  as  may  have  been  agreed  upon,  receiving 
in  return  the  securities,  which  they  are  then  at  lib- 
erty to  dispose  of  as  they  see  fit.  If  the  market 
price  rises  the  gain  goes  to  the  capitalists,  if  it  falls 
they  lose.  Of  course  the  sums  needed  often  exceed 
the  wealth  of  any  one  person  or  group  of  persons, 
and  each  purchaser  has  to  depend  on  his  ability  to 
dispose  of  the  securities  to  raise  the  money  to  meet 
his  agreement. 


l/NIVERS/TY 
CHAP,  in  PA  vMitoten  flp  tfAurfp  PR  T  313 

In  both  of  these  cases  various  secondary  considera- 
tions as  to  the  form  of  the  loan,  the  length  of  time 
it  has  to  run,  etc.,  affect  the  result.  Sometimes 
it  has  been  deemed  wise  to  combine  the  two 
methods.  That  is,  to  negotiate  with  the  bankers  for 
terms  on  a  part  of  the  debt,  and  then  to  offer  an- 
other part  on  similar  terms  to  popular  subscription, 
or  even  to  allow  of  more  general  competition  as  to 
the  terms. 

SEC.  2.  The  amount  of  the  interest  or  the  rate  is 
the  chief  factor  in  the  negotiation  of  a  debt ;  but  the 
place  and  times  of  payment  and  the  kind  piace  Ofpay- 
of  money  in  which  payment  will  be  made  ment  ofinter- 

.  ,  .  .-iii      €St>  and  minor 

are  minor  considerations  of  considerable  Considera- 
weight.  So,  also^is  the  size  of  the  bonds.  tions- 
In  the  case  of  popular  loans  which  are  intended  to 
be  subscribed  for  by  the  mass  of  the  people,  the 
bonds  must  be  for  small  amounts  ;  in  other  cases  the 
units  are  larger.  There  is  no  uniformity  in  this 
matter.  The  larger  the  bonds  can  be  made,  the 
easier  it  is  for  the  treasury  to  manage  the  debt.  Of 
some  importance  too  is  the  choice  between  bonds 
that  are  payable  to  the  holder,  or  to  certain  persons 
by  name,  and  those  payable  to  persons  registered  on 
the  books  of  the  State.  If  the  bonds  are  payable  to 
the  holder  there  is  no  need  of  a  record  of  the  holders 
by  the  government.  The  government  is  also  spared 
the  trouble  and  expense  of  recording  changes  in 
ownership.  But  there  is  an  advantage  of  greater 
safety  bp  the  holders  in  the  case  of  the  recorded 


314         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

bonds,  which  are  thus  ensured  against  loss  or 
theft. 

It  is  in  general  customary  to  determine  the  place 
at  which  the  interest,  etc.,  will  be  paid.     This  is 
frequently  some  important  commercial  centre,  some- 
times the  treasury  of  the  State.     If  in 

Payment  in  J 

some  commer-  the  country  issuing  the  bonds  there  .be 
ciai  centre.  ^  circu]_ation  a  debased,  redundant,  or 
depreciating  currency,  it  is  often  agreed  to  pay 
the  interest  in  some  foreign  commercial  centre,  or 
in  foreign  money,  in  order  to  secure  payment  in 
a  stable  currency.  Thus  many  of  the  common- 
wealths of  the  United  States  which  contracted  debts 
between  1830  and  1850,  agreed  to  pay  the  interest  in 
London  in\nrder  to  ensure  the  payment  in  gold,  and 
to  guard  their  creditors  against  loss  from  the  depreci- 
ated currency  then  in  circulation.  When  the  States 
appealed  to  Congress  for  assistance  in  the  payment 
of  their  debts  in  1842,1  this  was  alleged  as  a  feature 
involving  special  hardship.  A  large  part  of  Russia's 
debt  is  payable  in  Holland  and  England,  and  in  all 
of  it  the  kind  of  money  is  specified.  The  same  is 
true  of  the  debts  of  many  other  countries. 

SEC.  3.  While  it  is  often  necessary,  in  order  to 
Conversion  of  obtain  the  required  funds  on  the  best 
the  debt.  terms,  to  offer  many  different  forms  of 
public  securities,  yet  in  a  time  of  absence  of  press- 

1  See  Johnson,  Eeport  on  the  Relief  of  the  States,  27th  Con.,  3d 
Sess.,  House,  No.  296 ;  a  perfect  mine  of  information  on  the 
history  of  public  debts  in  the  United  States  up  to  1842. 


CHAP,  in  CONVERSION  315 

ure  it  may  become  desirable  to  simplify  these  forms 
and  to  consolidate  thejlebt.  This  involves  the  calling 
in  of  the  outstanding  paper  and  its  conversion  into 
another  fojm.  Conversion  is  generally  undertaken 
when  a  fall  in  the  rate  of  interest  offers  the  State  an 
opportunity  to  gain  by  the  process.  The  reduction 
of  the  rate  of  interest  is  possible  whenever  the  State 
enjoys  the  privilege  of  repayment.  It  can  then 
offer  the  creditor  the  choice  of  payment  (for  which 
it  could  obtain  the  money  by  the  sale  of  new  bonds 
at  the  new  rate  of  interest)  or  of  new  securities  at 
the  lower  rate.  This  mode  of  conversion  or  reduc- 
tion of  interest  is,  of  course,  perfectly  legitimate. 
The  reduction  of  the  rate  arbitrarily  without  the 
consent  of  the  creditors  is  as  much  repudiation  as 
the  refusal  to  pay  altogether.  It  is  by  numerous 
conversions  and  consolidations  that  the  rate  of  inter- 
est on  the  bulk  of  the  debt  of  Great  Britain  has  been 
reduced  as  low  as  2|^  per  cent. 

SEC.  4.  The  best  justification  of  debt-making  is 
that  it  distributes  the  burden  of  some  heavy  ex- 
penses upon  a  later  period.  The  cost  of  this  post- 
ponement is  the  payment  of  the  annual  interest.  In 
order  to  -fulfil  the  intention  of  the  loan  Debts  must  be 
and  to  get  rid  of  the  cost  of  the  process  Paid- 
it  is  necessary  to  pay  the  debt.  If  these  two  reasons 
were  not  sufficient,  the  danger  of  the  recurrence 
of  similar  extraordinary  needs  and  new  appeals  to 
credit,  and  the  eventual  danger  of  bankruptcy, 
point  in  the  same  direction.  As  we  have  already 


316         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

seen,  some  of  the  forms  of  debts  contain  within 
themselves  the  provision  for  payment.  Life  and 
terminable  annuities  involve  the  payment  of  the 
principal  in  annual  instalments.  Other  forms  call 
for  payment  in  larger  instalments  or  at  a  definite 
termin,  for  which  provision  must  be  made  by  the 
collection  of  funds  beforehand.  If,  however,  the 
expiration  of  the  period  finds  the  debtor  State 
not  in  the  possession  of  the  funds  needed,  it  may 
have  to  borrow  again  to  fulfil  its  agreements.  In 
the  case  of  most  perpetual  debts  it  would  be  obvi- 
ously unfair  to  call  upon  certain  holders  for  the 
surrender  of  their  bonds  and  to  allow  other  holders 
of  the  same  sort  of  bonds  to  retain  theirs,  espe- 
cially if  the  rate  of  redemption  is  below  the  market 
rate.  The  whole  of  any  issue  of  bonds,  therefore, 
must  be  treated  as  a  unit.  This  involves  the  grad- 
ual accumulation  of  a  fund  for  the  payment  of  all 
of  the  debt  of  the  same  kind  and  issue.  There  is, 
however,  another  alternative.  The  government  may 
enter  the  market  with  this  fund,  before  it  is  large 
enough  to  pay  all  the  debt,  and  purchase  such  of 
its  securities  as  are  offered  for  sale.  Care  must  be 
exercised  in  the  application  of  this  method  not  to 
raise  the  price  of  the  securities. 
The  sinking  Provision  made  for  the  accumulation 
fund.  of  a  fund  for  the  redemption  of  the 

debt  is  called  the  sinking  fund.1     The  sinking  fund 

1  See  Ross,  "  Sinking  Funds,"  Pub.  Amer.  Economic  Assoc., 
VII. ,  p.  445. 


CHAP,  in  REDEMPTION  OF  DEBT  317 

may  be  defined  in  two  ways;  either  it  is  an  an- 
nual fund,  i.e.  a  portion  of  the  annual  income,  or  it  is 
the  accumulated  capital  from  this  and  other  sources 
applicable  to  the  payment  of  the  debt.  Not  strictly 
the  earliest,  but  the  first  important  attempt  at  the 
arrangement  of  a  regular  sinking  fund  is  that  of 
England  in  1786  under  Pitt.  This  was  a  remark- 
able scheme.  It  is  said  to  have  been  suggested  by 
Price,  a  clergyman,  who  in  1772  wrote  An  Appeal 
to  the  Public  on  the  Subject  of  the  National  Debt. 
His  argument  was  based  on  the  productiveness  of 
compound  interest.  He  urged  that  a  fixed  sum, 
however  small,  should  be  set  aside  every  year  for 
the  purchase  of  public  stock,  and  that  the  interest 
on  the  stock  thus  purchased  should  continue  and 
should  be  applied  to  further  purchases.  There 
would  then  be  two  sources  from  which  the  debt 
would  be  cancelled:  one,  the  payment  of  the  annual 
amount ;  the  other,  the  ever  increasing  interest  fund. 
The  effect  of  such  a  scheme  in  eventually  discharg- 
ing any  debt  was  regarded  as  almost  magical.  It 
was  not  perceived  that  the  real  efficacy  of  the  scheme 
lay  in  the  fact  that  the  nation  continued  to  bear  the 
whole  burden  of  the  initial  interest  charge  until  the 
debt  was  paid,  and  that  the  real  source  of  payment 
was  the  excess  of  taxation  over  expenditure.  In 
accord  with  this  idea  Pitt  appointed  a  pitt>s  Sinjcinff 
"Board  of  Commissioners  of  the  Sink-  fund- 
ing  Fund,"  who  were  to  receive  a  fixed  sum  each 
year,  with  which  to  purchase  public  stocks,  at  or 


318         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

below  par.  Interest  on  the  •  stocks  thus  purchased 
was  to  be  paid  to  the  commissioners,  and  quarterly 
applied  to  new  purchases.  This  much-admired 
scheme  amounted  to  adding  XI, 000,000  annually 
to  the  taxes  needed  for  other  purposes,  and  co^n- 
tinuing  the  entire  burden  of  taxation  until  the 
debt  was  paid.  It  is  clear  that  what  was  really 
used  for  debt  payment  was  the  surplus  revenue. 
The  £1,000,000  was  clearly  that,  and  the  interest 
on  the  stocks  purchased  therewith  need  not  have 
been  paid  but  for  the  sinking  fund.  There  is,  in- 
deed, no  source  from  which  the  debt  can  be  paid 
but  taxation  or  similar  net  revenue.  So  great  was 
the  faith  of  the  government  in  this  scheme  that  it 
continued  the  payments  to  the  sinking  fund  even 
while  borrowing  for  the  war  of  1793  and  after. 
The  fallacy  of  Dr.  Price's  arguments  was  pointed  out 
by  Professor  Robert  Hamilton  of  Aberdeen  in  1813. 
Shortly  after  that,  it  was  estimated  that,  as  a  result 
of  the  sinking  fund  system  kept  up  during  a  period 
of  borrowing,  the  government  had,  between  1785  to 
1829,  borrowed  £330,000,000  at  5  per  cent  to  pay 
a  debt  of  the  same  size  at  4|-  per  cent.  The  scheme 
was  then  abandoned,  never  to  be  resumed.  From 
this  time  on  only  genuine  surpluses  were  applied 
to  the  payment  of  the  debt.  This  abandonment 
of  the  idea  of  Price  and  Pitt,  however,  had  a  rather 
disastrous  result,  in  that  it  largely  suspended  debt 
payment  in  favour  of  tax  remission.  Since  1875 
England  has  tried  a  new  plan.  Without  commit- 


CHAP,  in  REDEMPTION  OF  DEBT  819 

ting  herself  to  a  policy  which  would  involve  paying 
debts  with  one  hand  and  borrowing  with  the  other, 
and  without  relying  upon  mere  chance  77^  new  sinlc_ 
surpluses,  she  decided  to  appropriate  ^gfund.  - 
a  fixed  sum  from  the  consolidated  fund  for  the 
national  debt  services,  to  be  continued  as  long  as 
there  were  no  extraordinary  calls  upon  the  funds. 
£25,000,000  are  now  annually  appropriated  for  the 
national  debt  services,  of  which,  in  1895,  £1,718,268 
3s.  Id.  went  into  the  new  sinking  fund ;  whereas  in 
1875  the  sum  was  fixed  at  £28,000,000,  and  a  larger 
amount  went  into  the  sinking  fund.  In  addition 
to  this  England  has  been  converting  her  debt  into 
terminable  annuities,  resulting  in  a  mechanical 
method  of  debt  payment  which  may  in  time  of 
pressure  work  as  the  old  sinking  fund  did. 

SEC.  5.    The  American  system  of  debt  paying  be- 
gan in  1790  with  the  application  of  a  surplus  from 
tunnage  fees  and  imports  to  the  purchase  American 
of  public  bonds  in  order  partly  to  im-  temsofdebt 
prove  the  market  price  of  the  bonds  and  paymt 
facilitate  conversion.     In  1792  the  bonds  thus  pur- 
chased, were  made  the  basis  of   a  sinking  fund,  it 
being  determined  that  the  interest  on  them  should 
continue  and  be  paid  to  a  commission  for  the  fur- 
ther purchase  of  public  bonds.     In  1795  the  sinking 
fund  commissioners  were  made  the  recipients  of  cer- 
tain revenues  to  be  applied  to  the  payment  of  defi- 
nite  portions   of   the   debt.     Ross  thus  summarises 
this  fund  :  "  The  sinking  fund  was  now  enlarged  by 


320         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

the  following  additional  appropriations:  (1)  so 
much  of  the  permanent  duties  as,  with  existing 
income,  should  enable  the  commissioners  to  pay,  in 
1796  and  thereafter,  a  yearly  2  per  cent  of  the 
6  per  cent  stock;  (2)  the  surplus  dividends  on 
the  government  12,000,000  of  United  States  Bank 
stock  after  deducting  the  interest  accruing  on  the 
remnant  of  the  bank  loan;  (3)  so  much  of  the  per- 
manent duties  as,  with  the  surplus  dividends,  should 
suffice  to  pay  a  yearly  $200,000  on  the  bank  loan, 
till  1802,  and  then  begin  the  redemption  of  the 
deferred  stock;  (4)  the  proceeds  of  the  sale  of 
public  lands;  (5)  the  proceeds  of  debts  inherited 
from  the  old  government;  (6)  all  revenue  sur- 
pluses of  any  year  remaining  unappropriated  during 
the  next  session  of  Congress."1  This  fund  was  not 
very  efficient  on  account  of  the  excess  of  expendi- 
tures. It  served  one  very  important  purpose,  how- 
ever, that  of  regulating  the  credit  of  the  United 
States  by  showing  the  intention  to  pay.  In  1802 
Gallatin  organised  another  plan,  which  was  continued 
for  some  time.  It  was  to  increase  the  revenues 
beyond  the  current  expenditures  and  apply  the 
surpluses  to  the  debt  payment.  The  results  of  the 
two  plans  have  been  compared  as  follows :  "  The 
inherited  debt  and  accrued  interest  amounted  in 
1791,  when  funded,  to  $76,781,953.14.  The  Feder- 
alists in  ten  years  reduced  this  to  172,733,599,  but 
added  $7,193,400  of  new  stock,  mostly  at  8  per 
i  "  Sinking  Funds,"  p.  49. 


CHAP,  in  REDEMPTION  OF  DEBT  321 

cent,  thus  bequeathing  a  burden  of  $79,926,999  to 
their  successors.  Of  this,  Gallatin's  sinking  fund 
extinguished  $46,022,810  between  1801  and  1811. 
The  purchase  of  Louisiana,  however,  added  $11,250,- 
000  to  the  principal,  so  that  on  January  1,  1812,  the 
public  debt  was  $45,154,189,  over  thirty-one  mill- 
ions less  than  the  original  Revolutionary  debt."1 
This  comparison  is  not  altogether  fair  to  Hamilton, 
the  author  of  the  older  plan,  for  his  fund  enabled 
important  conversions  to  be  successfully  made  which 
reduced  the  debt  charges.  During  the  War  of  1812 
the  payments  to  the  sinking  fund  were  suspended. 
After  the  war  the  debt  stood  : 

Old  debt  remaining    .        ...        .  $39,905,183.66 

Funded  war  debt        .        .     '.        .  49,780,322.13 

Treasury  notes 18,452,800.00 

Temporary  loans         ....  550,900.00 

Total  burden  on  the  sinking  fund  $108,689,205.79 

The  sinking  fund  was  at  that  time  composed  of 

Interest  on  stock  held  by  com.  .  .  $1,969,577.64 
Receipts  from  public  lands  .  .  .  800,000.00 
From  duties 5,230,422.36 

Sinking  fund         ....     $8,000,000.00* 

The  policy  of  protection,  inaugurated  after  the  War 
of  1812,  separated  income  from  expenditure.  The 
ultimate  purpose  of  most  of  the  taxation,  namely 
protection,  was  considered  so  paramount  that  a  high 

1  Ross,  p.  67. 

2  Ross,  p.  69,  from  Finance,  Vol.  II.,  p.  916. 


322         INTRODUCTION  TO  PUBLIC  FINANCE     PART  in 

rate  of  taxation  was  continued  for  that  reason. 
The  available  surpluses  were,  therefore,  large,  and 
were  from  time  to  time  applied  to  the  debt.  Down 
to  1824,  when  all  the  debt  contracted  up  to  that 
time  was  practically  paid,  the  sinking  fund  was 
managed  by  a  special  commission,  but  since  then 
the  secretary  of  the  treasury  has  had  charge  of  it. 
The  Civil  War  debt  was  by  the  act  of  February  25, 
Sinking  fund  1862>  supposedly  placed  on  a  secure 
of  the  civil  basis.  "  The  coin  paid  for  duties  on  im- 
ports was  to  be  applied  first  to  the  pay- 
ment of  interest  on  the  bonds  and  notes  of  the 
United  States.  It  was  then  to  be  applied  'to  the 
purchase  or  payment  of  1  per  cent  of  the  entire 
debt  .  .  .  to  be  made  within  each  fiscal  year,  which  is 
to  be  set  apart  as  a  sinking  fund,  and  the  interest  of 
which  shall  in  like  manner  be  applied.'  .  .  .  The 
residue  of  customs  receipts  was  to  be  paid  into  the 
treasury."1  While  no  such  regularity  as  was  con- 
templated by  this  act  was  realised,  yet  the  debt  has 
been  paid  from  surpluses  more  rapidly  than  was 
anticipated,  until  the  reduction  of  the  revenues  in 
1895,  due  to  a  change  in  the  policy  in  regard  to  the 
protective  duties,  together  with  a  redundancy  in  the 
monetary  circulation,  which  resulted  in  a  foreign 
drain  upon  the  gold  reserves  held  for  the  redemp- 
tion of  notes  outstanding,  made  new  borrowing 
necessary. 

The   commonwealth  constitutions   of   the  United 
1  Ross,  p.  79. 


CHAP,  in  REDEMPTION  OF  DEBT  323 

States  very  generally  charge  upon  the  legislatures 
the  duty  of  providing  a  sinking  fund.  Many  of 
them,  besides  limiting  the  amount  of  Gommon_ 
debt  that  may  be  created,  either  by  wealth  sink- 
naming  a  fixed  sum  or  a  proportion  of  m9^w 
the  revenues  that  may  be  used  for  interest  payment, 
also  provide  that  whenever  a  debt  shall  be  con- 
tracted, a  tax  shall  at  the  same  time  be  levied  suffi- 
ciently large  to  pay  the  interest  charge  and  provide 
a  sinking  fund.  The  general  distrust  of  the  legis- 
latures is  emphasised  in  the  constitutions  by  making 
such  laws  irrepealable  until  the  debt  is  paid.  The 
commonwealths  are  thus  permanently  committed  to 
the  policy  of  debt  payment,  not  so  much  on  account 
of  any  deep-seated  belief  in  the  efficacy  of  the  par- 
ticular methods  laid  down,  which  may  necessitate  the 
continuance  of  debt  payment  even  at  a  time  of 
borrowing,  but  on  account  of  the  well-founded  dis- 
trust of  the  prudence  of  the  legislatures.  The  same 
distrust  has  destroyed  the  danger  of  the  system,  by 
almost  entirely  forbidding  debt-making  by  the  com- 
monwealths.1 

SEC.  6.  In  conclusion,  it  would  seem  that  the 
experience  of  great  nations  shows :  that  debts  must 
be  paid;  that  they  can  be  paid  only  by  increased 
taxation;  and  that  the  possible  weight  of  taxation 

1  For  a  full  account  of  the  debt  policy  of  the  American  com- 
monwealths see  my  monograph,  Das  Kreditwesen  der  Staaten  und 
Stddte  der  Nordamerkanischen  Union  in  seiner  historischen  Ent- 
wickelung,  Jena,  1891. 


324         INTRODUCTION  TO  PUBLIC  FINANCE    PART  in 

for  this  purpose  is  determined  by  a  consideration 
(1)  of  the  length  of  time  it  is  thought  desirable 
that  the  debt  shall  run,  (2)  of  the  existing  burden 
of  taxation,  (3)  of  the  general  conditions  of  the 
people.  When  the  debt  has  been  contracted  for 
some  productive  purpose  it  seems  fitting  that  the 
surplus  earnings  of  such  an  enterprise  should  go -to 
debt  payment,  as  this  eventually  enables  a  perma- 
nent lowering  of  the  cost  of  such  services  to  the 
people. 


PART   IV 
FINANCIAL  ADMINISTRATION 

CHAPTER  I 

THE  BUDGET;  ADMINISTRATION  OF  EXPENDITURE; 
CONTROL  AND  AUDIT 

SECTION  1.  To  the  fourth  and  last  part  of  our 
subject  belong  the  formal  arrangements  of  the  public 
finances,  —  the  preparation  and  ratification  of  the 
budget,  the  care  and  preservation  of  the  public 
funds,  the  administration  and  control  of  expendi- 
tures, and  the  collection  of  the  revenues.  It  was 
this  side  of  the  subject  that  first  attracted  attention 
and  which  occupied  a  large  part  of  the  writings  of 
the  Cameralists.  Lorenz  von  Stein  gives  a  very  con- 
siderable portion  of  his  monumental  work  to  these 
subjects,  and  the  able  French  writer,  Stourm,  has  de- 
voted to  financial  legislation  a  volume  entitled  Le 
Budget.  English  and  American  economists  have 
generally  left  this  field  to  the  jurists  and  publicists, 
but  Bastable  devotes  the  last  three  chapters  of  his 
book  to  some  of  these  topics. 

325 


326         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

In  every  well-regulated  household  and  every 
business  concern  the  keeping  of  accurate  accounts, 
Theimpor-  the  distribution  of  the  funds  among 
tance  of  cor-  different  persons,  and  the  control  of 

rect  methods 

of  fiscal  ad-  expenses  have  an  importance  second 
ministration.  on\y  ^o  the  broader  questions  of  policy. 
Equally  important  in  the  greater  housekeeping,  of 
the  State  are  the  formal  arrangements  for  the  enact- 
ment of  fiscal  laws,  for  the  keeping  of  accounts,  and 
for  ensuring  compliance  with  the  laws. 

The  general  frame  of  the  fiscal  administration, 
the  relation  between  the  various  departments,  the 
assignment  of  particular  powers  and  duties  to  the 
different  officials  or  bodies,  depends  entirely  upon 
the  general  political  organisation.  How  these  feat- 
ures differ  from  country  to  country  it  is  the  prov- 
ince of  Political  Science  to  describe.  But  the  frame 
of  administration  has  an  effect  on  the  finances ;  and 
there  are  certain  principles  demanded  by  sound 
finance,  which  are  followed  by  every  country,  no 
matter  what  its  frame  of  government.  Hence,  there 
is  no  excuse  for  omitting  this  part  of  the  subject. 

SEC.  2.  Of  necessity  the  methods  of  accounting 
and  control  do  not  assume  a  public  character  until 
Histo  offis  there  is  a  pretty  clearly  recognised  popu- 
caiadminis-  lar  interest  in  the  affairs  of  the  State. 
At  one  time  the  Roman  treasury  under 
the  control  of  the  Censors  and  in  charge  of  the 
Qucestors  exhibited  the  features  of  public  economy. 
But  under  the  Empire  the  public  treasury  and  the 


CHAP,  i  THE  BUDGET  327 

private  treasury  of  the  Caesars  gradually  merged  into 
a  single  one,  and  the  methods  of  accounting  became 
that  of  private  rather  than  of  civic  housekeeping. 

The  middle  ages  were  essentially  unpolitical,  and 
in  that  period  no  system  of  public  treasuries  proper 
was  developed,  except  in  the  free  cities.  As  we 
have  already  seen,  there  were  no  revenues  collected 
in  the  monarchies  for  a  distinctly  public  purpose 
until  the  fifteenth  and  sixteenth  centuries,  and  con- 
sequently there  could  be  no  public  accounts  or  pub- 
lic control  over  the  funds. 

The  constant  struggle  between  the  representatives 
of  the  people  and  the  officers  of  the  older  abso- 
lute governments  for  the  control  of  the  Conftict  devei_ 
purse  led  to  the  development  of  distinct  ops  legislative 
methods  of  accounting  and  control.  The  c 
most  striking  feature  of  the  modern  systems  in 
European  countries  is  the  establishment  of  the  bud- 
get, and  of  the  right  of  the  popular  representatives 
to  vote  taxes  and  appropriations.  In  America  the 
right  of  the  legislatures  to  control  the  finances  was 
clearly  established  at  a  very  early  date,  and  little 
or  no  advance  has  been  made  beyond  the  crude 
methods  first  developed.  Most  European  countries 
have  advanced  more  rapidly  and  perfected  far  better 
systems.  This  higher  development  of  the  budget  in 
European  constitutional  governments  is  explained 
by  the  constant  conflict  between  the  branches  of  the 
government  having  interests  which  are  theoretically 
opposed.  The  modern  budget  is  an  outgrowth  of 


328         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

the  gradual  assumption  of  power  by  the  legislatures, 
and  the  corresponding  loss  of  power  by  the  execu- 
Euro  ein  tives.  The  latter  have  had  to  ask  for 
advance  of  funds,  and  the  former  in  granting  them 
have  insisted  upon  knowing  what  they  are 
to  be  used  for,  and  upon  having  assurance  that  they 
will  not  be  applied  in  any  other  way.  In  the  United 
States,  however,  both  the  federal  and  the  common- 
wealth legislatures  suggest,  or  initiate,  financial  legis- 
lation as  well  as  grant  funds.  Both  of  these  func- 
tions of  initiation  and  of  grant  being  in  the  same 
hands,  there  is  no  conflict  of  interests  such  as  has 
developed  the  systems  of  financial  statements  and 
legislative  control  in  Europe.  The  only  care  in 
this  country  is  to  see  that  the  funds  are  not  appro- 
priated to  private  purposes,  while  in  Europe  there 
is  the  desire  to  prevent  the  application  of  the  funds 
to  other  public  purposes  than  the  ones  specified. 

SEC.  3.    It  has  been  claimed  that  the  English  sys- 
tem served  as  a  model  for  the  other  European  coun- 

Makingupthe  tries'  However  that  may  be,  and  it  is 
English  true  only  in  part,  the  English  system 

budget.  w^  serve  as  a  good  illustration  of  the 

European  methods.  The  fiscal  year  begins  April  1 
and  ends  March  31.  Each  department  of  the  ad- 
ministration prepares  a  careful  statement,  known 
as  the  "Estimates,"  for  the  coming  year.  These 
"  Estimates,"  each  of  which  comprises  a  good-sized 
quarto  volume,  are  tediously  exact  and  minute  in 
the  statement  of  what  it  is  expected  will  be  needed 


CHAP.  I  THE  BUDGET  329 

for  the  forthcoming  year.  They  are  called  the 
"  Army  Estimates,"  the  "  Navy  Estimates,"  the 
"  Civil  Service  Estimates,"  etc.  The  The  «Esti- 
Chancellor  of  the  Exchequer,  in  turn,  ""*««*•" 
bases  his  estimate  of  all  that  will  be  needed  upon 
these  statements,  and  calculates  the  receipts  from 
each  source  on  the  basis  of  the  revenues  of  the 
previous  year.  He  then  presents  all  the  documents 
to  Parliament  with  a  brief,  clear  statement  of  what 
the  expenditure  will  be,  what  it  is  expected  the 
revenues  will  be,  what  new  taxes,  if  any,  are  needed, 
or  what  taxes  may  be  remitted  or  changed,  in  order 
to  make  the  revenues  equal  the  expenditure.  This 
statement  is  called  the  budget.  "  Usually,  but  by  no 
means  always,  the  proposals  of  the  Chancellor  of  the 
Exchequer  are  accepted  by  the  Commons,  and  even 
when  they  are  not  in  detail  it  is  seldom  that  the 
items  of  expenditure  are  objected  to.  The  House  is 
supposed  to  go  through  the  4  estimates '  in  detail ; 
it  forms  itself  into  a  4  Committee  of 

O  1          >  J  J.'  •          4-1,  ThB  "  V°teS" 

Supply,  and  sanctions  every  item  in  the 
three  bulky  volumes,  but  its  members  have  not,  as  a 
rule,  knowledge  enough  of  the  details  to  offer  effec- 
tive criticism,  and  the  utmost  the  committee  can  be 
said  to  do,  on  the  average,  is  to  render  flagrant 
abuses  impossible.  On  the  average,  perhaps  that  is 
enough."1  Parliament  cannot  directly  or  indirectly 
increase  the  appropriations  asked  by  the  ministry  in 
the  name  of  the  Crown,  nor  add  new  appropriations. 
1  Wilson,  The  National  Budget,  p.  147, 


380         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

The  estimates  both  of  revenues  and  expenditure  are 
made  with  such  great  care  that  there  is  seldom  either 
a  surplus  or  a  deficit  of  any  large  amount  at  the  end 
of  the  year.  According  to  Bastable  the  estimates  of 
expenditure  in  England  for  the  three  years  April  1, 
1889,  to  March  31,  1892,  as  compared  with  the  re- 
sults, show  an  error  of  only  .£137,000  in  a  total  of 
£264,000,000,  or  a  little  over  Is.  per  £100,  or  $1  in 
Smaiinessof  $2000.  All  credits  of  disbursing  offi- 
errors.  cers  expire,  and  their  accounts  close, 

March  31.  All  appropriations  lapse  at  that  time, 
except  those  appropriated  for  the  consolidated  fund. 
It  requires  a  special  act  of  Parliament  to  spend 
any  more  money  on  last  year's  account  even  though 
the  original  appropriation  may  not  have  been  ex- 
hausted. 

In  the  United  States  there  is  no  connection  be- 
tween the  executive  and  legislative  departments  of 
the  government  that  would  allow  of  any  such  ar- 
rangement as  that  of  the  budget  in  England.  The 
reports  of  the  administrative  officers,  the  President, 
and  the  Secretary  of  the  Treasury,  are  made  to  Con- 
gress and  are  often  accompanied  by  suggestions  of 
various  sorts.  But  the  executive  officers  have  no 
real  access  to  the  ear  of  the  House.  Therefore,  no 
Congressional  formal  budget  is  presented  to  Congress. 
financiering.  Two  separate  committees  in  the  House 
(where  finance  bills  originate,  although  they  may  be 
amended  by  the  Senate)  deal  regularly  with  finances; 
one  with  taxation,  the  other  with  appropriations. 


CHAP.  I  THE  BUDGET  331 

These  committees  are  the  "  Committee  on  Ways  and 
Means"  and  the  "  Committee  on  Appropriations." 
Bills  involving  expenditure  or  taxation  are  regu- 
larly referred  to  these  committees.  The  control  of 
these  committees  rests  solely  on  convention,  there 
being  no  constitutional  provision  for  such  reference. 
Even  after  the  committee  has  presented  an  appro- 
priation or  revenue  bill,  there  is  the  greatest  freedom 
of  amendment,  and  theoretically  any  member  of  the 
House  could,  if  so  inclined,  present  an  entire  new 
set  of  such  bills  forming  a  budget.  Appropriations 
may  be  increased  or  decreased,  or  new  ones  intro- 
duced, without  reference  to  the  committees.  Prac- 
tically the  control  of  these  committees  is  very  great, 
especially  in  the  matter  of  suppressing  appropria- 
tion bills  that  may  be  referred  to  them  for  considera- 
tion. Certain  lines  of  expenditure  may  be  suggested 
by  other  committees,  and  theoretically  may  be  voted 
on  without  reference  to  these  controlling  committees. 
For  example,  the  Navy  and  War  departments  may 
receive  appropriations  suggested  by  the  committees 
in  charge  of  them.  Many  other  committees,  as, 
for  example,  the  ones  on  claims,  on  invalid  pensions, 
pensions,  etc.,  regularly  bring  in  bills  involving 
expenditure. 

Ever  since  the  protective  policy  was  fully  estab- 
lished   the    government    has    been    in  Revenue  laics 
the  possession  of  large  revenues,  which  s^.^r^d  ro 
are  not  determined  in  any  way  by  the  priations. 
expenditures.      So  that    the   consideration   of  rev- 


332         INTRODUCTION  7"O  PUBLIC  FINANCE     PART  iv 

enue  bills  has  always  been  complicated  by  other 
than  fiscal  considerations,  except  during  the  Civil 
War.  This  sundering  of  the  functions  of  spending 
and  of  obtaining  revenues,  and  the  general  scatter- 
ing of  appropriations,  would  apparently  cause  the 
utmost  confusion.  But  the  result  is  not  so  bad  as 
might  be  expected,  (1)  because  of  the  influence  of 
the  committees,  (2)  because,  of  course,  some  attempt 
is  made  by  the  House  itself  to  ascertain  whether 
funds  are  or  will  be  available  for  the  purposes  sug- 
gested, (3)  because  the  tax  system  has  not  been  a 
variable  one,  and  has  yielded,  until  recently,  a  pretty 
regular  and  gradually  increasing  revenue,  to  spend 
which  has  often  taxed  to  the  utmost  the  ingenuity 
of  Congress.  But  the  system  absolutely  prevents 
any  systematic  oversight  of  the  finances  as  a  whole, 
and  allows  of  no  measurement  of  the  relative  weight 
of  each  appropriation.  Credits  to  spending  officers 
do  not  expire  at  the  end  of  the  fiscal  year,  July  1, 
as  in  England,  but  generally  continue  in  force  until 
the  entire  sum  is  consumed  or  the  object  is  accom- 
plished. Congress  thus  loses  one  advantage  for  the 
control  of  expenditure  that  Parliament  enjoys.  The 
American  system,  however,  has  one  great  advantage 
over  the  English  in  that  it  allows  of  a  more  critical 
investigation  by  the  legislature  of  the  specific  items 
of  each  appropriation. 

The  fiscal  The  date  at  which  the  fiscal  year  ex- 

vear-  pires  is  generally  set  with  reference  to 

the  convenience  of  officials  in  rendering  their  reports 


CHAP.  I  CONTROL  AND  AUDIT  333 

and  to  the  meetings  of  the  legislatures.  The  ac- 
counts presented  are  generally  for  gross  income  and 
expenditure,  so  that  the  details  of  the  cost  of  col- 
lecting revenues  and  chance  savings  of  expenditures 
can  be  controlled. 

There  is  theoretically  no  sanction  for  expenditure 
of  any  kind  beyond  the  amount  appropriated  by  the 
legislature.  If  any  expenditure  not  so  Deficiency 
sanctioned  is  of  pressing  necessity,  the  bills- 
administrative  officers  may  sometimes  assume  the 
responsibility  and  make  the  appropriation,  subject 
to  the  ratification  of  the  legislature  when  it  next 
meets.  This  discretionary  power  is  exercised  to  a 
very  limited  extent  in  most  countries.  In  the 
United  States,  however,  the  disorder  attendant  upon 
the  appropriations  involves  the  annual  presentation 
of  a  "deficiency  bill."  When  any  action  involving 
expenditure  has  been  sanctioned  by  the  legislature, 
and  insufficient  funds  have  been  appropriated,  there 
is  a  moral  obligation  resting  on  the  legislature  to 
make  the  requisite  appropriation  afterward. 

SEC.  4.  When  the  budget  has  been  prepared  and 
voted,  the  next  step  is  to  see  that  the  expenditure  is 
carried  out  as  authorised  and  to  prevent  any  mis- 
appropriation of  the  funds.  In  England  English  con- 
the  funds  are  deposited  with  the  Bank  of  troi  and  audit. 
England,  subject  to  the  order  of  the  Comptroller  and 
Auditor  General  only.  This  officer's  duties  are  a 
combination  of  those  of  the  old  Board  of  Audit 
created  by  Pitt  in  1785  with  those  of  the  Ex- 


334         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

chequer,  and  date  from  1866.  No  payment  is  made 
without  (1)  an  Act  of  Parliament,  (2)  a  requisition 
by  the  Treasury 1  issued  to  the  Comptroller  General, 
(3)  a  grant  of  credit  for  the  amount  authorised  by 
the  Act  good  for  one  year,  (4)  a  Treasury  order 
directing  the  transfer  of  the  money  to  the  Pay- 
master General  of  the  Service.2  As  the  esti- 
mates have  been  closely  scrutinised,  there  is  little 
opportunity  for  the  misapplication  of  funds.  There 
is  none  whatever  for  over-draft.  Again,  after  the 
expenditure  has  been  made,  the  accounts  with 
vouchers  are  passed  through  the  Comptroller's  office 
for  his  approval,  or  audit.  The  report  of  that 
officer  is  subjected  to  the  final  revision  of  the  Par- 
liamentary Committed  of  Public  Accounts.  Thus 
the  whole  process  begins  and  ends  with  Parliament. 
It  will  be  seen  that  there  are  really  two  parts  to 
the  process.  First,  the  control  over  the  "issues" 
to  the  disbursing  officers,  that  is,  over  the  placing 
of  the  public  moneys  in  their  hands.  Secondly, 
the  audit  of  the  accounts  after  the  expenditures 
have  been  made. 

SEC.  5.  In  the  United  States,3  the  direct  control 
of  the  money  is  in  the  hands  of  the  executive 
officers,  subject  to  the  orders  of  Congress.  The 
safeguards  consist  in  making  the  processes  of  ex- 

1  See  Wilson,  The  State,  pp.  696-698. 

2  Cf.  Bastable,  p.  705. 

8  See  Renick  and  Thompson,  Political  Science  Quarterly,  VI., 
248-281,  and  VII.,  468-482. 


CHAP.  I  CONTROL  AND  AUDIT  335 

penditure  complicated  and  subjecting  each  item  to 
the  scrutiny  of  several  sets  of  executive  officers. 
The  idea  of  the  original  plan  in  the  Original  plan 
United  States  was  not  to  allow  of  issues  °Scontroland 

audit  in  the 

to  the  regular  disbursing  officers,  but  to  United  states. 
control  expenditure  by  a  careful  scrutiny  of  the 
accounts  or  claims  rendered.  The  Treasury  was 
to  be  reached  only  after  the  claims  had  been  cut 
down  to  the  lowest  possible  figure.  Claims  against 
the  government  were  first  passed  upon  by  an  au- 
ditor, then  by  a  comptroller,  either  of  whom  might 
reject  them.  Then  the  Secretary  drew  a  warrant 
upon  the  Treasurer,  and  that  warrant  was  recorded 
by  the  Register  and  countersigned  by  the  Comp- 
troller. Hamilton  found  it  necessary,  for  the  sake 
of  economy,  to  pay  cash  for  many  things  needed 
by  the  government,  and  hence  this  original  plan 
broke  down.  Issues  were  made  to  disbursing  offi- 
cers, and  the  necessary  warrants  were  drawn  for 
each  particular  item  of  expenditure,  afterward,  in 
order  to  legalise  the  transaction. 

For  many  years  the  United  States  had  a  very  com- 
plicated system  of  audit,  control,  and  record.     There 
were   six   Auditors,   so  called,   and    the   Therecentl 
"  Commissioner   of    the    General    Land  abandoned 
Office,"  who  was  Auditor  for  the  lands  plan' 
account.    Then  there  were  three  Comptrollers,  known 
as  the  First  and  Second  Comptrollers,  and  the  Com- 
missioner of   the  Customs.      Lastly  there  was  the 
Register.    All  of  these  were  assisted  by  a  large  body 


336         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

of  clerks.  These  offices  were  organised  into  four  co- 
ordinate branches,  with  separate  jurisdiction.  Ac- 
counts were  first  examined  and  passed  upon  by  an 
Auditor,  then  re-examined  by  a  Comptroller.  Claims 
disallowed  by  these  officers  could  be  pushed  in  the 
Court  of  Claims  and  appealed  from  there  to  the  Su- 
preme Court.  The  assignment  of  accounts  to  the 
different  Auditors  and  Comptrollers  was  almost 
arbitrary  and  with  little  system.  The  First  Auditor 
looked  over  the  general  income  and  expense  accounts 
of  the  Treasury,  the  special  accounts  of  the  customs 
receipts,  the  expenditures  for  the  legislative  and 
executive  departments,  special  accounts  of  the  Treas- 
ury department,  —  as  of  the  interstate  commerce 
commission,  of  the  public  debt,  of  engraving  and 
printing,  of  the  coast  and  geodetic  survey,  of  the 
life-saving  service,  of  the  lighthouse  establishment, 
of  the  public  buildings,  of  the  government  of  ter- 
ritories, of  the  District  of  Columbia,  of  the  central 
administrative  departments  of  War,  Navy,  the  In- 
terior, etc.,  of  the  departments  of  Labour  and  of 
Agriculture,  and  all  the  expenditure  for  the  Judi- 
ciary. The  Second  Auditor  had  the  accounts  from 
the  Indian  Service  and  the  Army.  The  Third 
Auditor  had  the  pension  account.  The  Fourth  had 
the  accounts  of  the  Navy.  The  Fifth  looked  over 
the  accounts  of  the  Collector  of  the  Internal  Rev* 
enues.  The  Sixth  was  for  the  postal  accounts. 
The  First  Comptroller  then  revised  the  accounts 
that  were  assigned  to  the  First  and  Fifth  Audi- 


CHAP,  i  CONTROL  AND  AUDIT  337 

tors,  except  the  Customs  account,  for  which  the 
Commissioner  of  the  Customs  was  Comptroller,  and 
those  of  the  Commissioner  of  the  General  Land 
Office.  The  Second  Comptroller  had  the  accounts 
of  the  Second,  Third,  and  Fourth  Auditors. 

All  of  this  has  recently  been  changed.  "  The  act 
of  July  31,  1894,  making  appropriations  for  the 
legislative,  executive,  and  judicial  ex-  Th&  regent 
penses  of  the  Government  for  the  fiscal  plan  of  audit 
year  ending  June  30,  1895,  altered  the  andcontro1- 
accounting  offices  of  the  Treasury  and  changed 
materially  the  system  of  accounting.  The  detail 
revision  of  accounts  here  to  fore  made  by  the  First 
Comptroller,  as  well  as  by  the  Second  Comptroller 
and  the  Commissioner  of  Customs,  is  abolished,  as 
are  the  offices  of  the  Second  Comptroller  and  the 
Commissioner  of  Customs,  the  First  Comptroller  be- 
ing made  the  sole  Comptroller  of  the  Treasury.  A 
revision  of  accounts  under  the  new  system  will  only 
be  made  when  either  the  head  of  a  Department  or  the 
claimant  is  dissatisfied  with  the  settlement  of  an  ac- 
count by  an  Auditor,  or  when  the  Comptroller  him- 
self has  reason  to  believe  that  any  particular  account 
ought  to  be  subjected  to  a  second  revision.  Much 
labour  will  be  saved  by  this  system,  and  the  adjust- 
ment of  accounts  ought  to  be  greatly  expedited.  It 
is  believed  this  will  be  accomplished  without  danger 
of  mistake  or  loss  to  the  government.  It  is  one  of 
the  duties  of  the  First  Comptroller  to  '  countersign 
all  warrants  drawn  by  the  Secretary  of  the  Treasury 


338         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

which  shall  be  warranted  by  law.'  This  duty  will 
continue  with  the  Comptroller  of  the  Treasury  under 
the  new  system.  As  the  Secretary  of  the  Treasury 
has  the  duty  devolved  upon  him  of  originating  war- 
rants, and  as  all  such  warrants  must  be  counter- 
signed by  the  Comptroller,  no  warrant  finally  becomes 
effective  without  their  concurrent  action."1 

There  are  now  six  Auditors:  (1)  for  the  Treas- 
ury Department,  (2)  for  the  War,  (3)  for  the 
Interior,  (4)  for  the  Navy,  (5)  for  the  State,  etc., 
(6)  for  the  Post  Office.  The  accounts  are  still  dis- 
tributed in  the  old  arbitrary  unsystematic  fashion 
among  the  different  Auditors  according  to  the  illog- 
ical scheme  by  which  the  different  duties  are 
divided  among  the  Departments.2  It  is  hard  to  see 
how  this  can  be  bettered  until  the  work  of  the 
Departments  is  rearranged.  The  recent  change  is 
a  great  gain  in  the  direction  of  simplicity  and  speed. 
The  Auditor's  work  stands  unless  appealed  to  the 
Comptroller,  and  is  no  longer  necessarily  gone  over 
again  by  a  comptroller. 

The  Register  keeps  ledger  accounts  with  all 
appropriations  made  by  Congress,  and  also  keeps  all 
The  Register's  the  personal  disbursement  and  receipt 
office.  accounts  pertaining  to  the  customs,  in- 

ternal revenue,  diplomatic,  treasury,  judiciary,  inte- 
rior, civil  services,  and  the  public  debt.  General 
receipt  and  expenditure  ledgers  have  been  kept 

1  Finance  Report,  1894,  pp.  836,  837. 

2  See  Wilson,  The  State,  pp.  567-570. 


CHAP.  I  CONTROL  AND  AUDIT  339 

running  from  the  foundation  of  the  government. 
The  Register  furnishes  to  the  proper  accounting 
officers  copies  of  all  warrants  covering  proceeds  of 
government  property,  where  the  same  may  be  nec- 
essary in  the  settlement  of  accounts  in  their  re- 
spective offices.  He  also  furnishes  certificates  of 
balances,  advances,  and  repayments  to  the  offices 
of  the  First  and  Fifth  Auditors,  for  settlements  of 
accounts,  and  certifies  to  the  First  Comptroller,  on 
requisitions  for  advances,  the  net  indebtedness  of 
disbursing  agents  as  shown  by  the  ledgers.1  The 
Treasury  Department  itself  exercises  a  pretty  ex- 
tensive supervision  over  expenditures. 

1  Finance  Eeport,  1894,  p.  737. 


340          INTRODUCTION  TO  PUBLIC  FINANCE      PART  iv 


CHAPTER  II 

COLLECTION    OF    THE    REVENUES,    CUSTODY   OP   THE 
FUNDS,   AND   THE  PUBLIC   ACCOUNTS 

SECTION  1.  Under  the  early  methods  of  collecting 
revenues,  the  tribute  due,  the  economic  receipts,  and 
the  voluntary  contributions  were  delivered  directly 
to  the  chief  or  leader.  Many  of  the  early  direct 
taxes  were  similarly  treated.  Indirect  taxes  upon 
commodities  and  transactions  could  not  be  managed 
in  this  way.  The  first  crude  method  of  dealing 
Early  methods  w^tn  these  taxes  was  that  of  the  tax- 
of  collecting  farmer,  the  Roman  Publican.  He  pur- 
chased for  a  price  the  privilege  of  col- 
lecting all  of  certain  kinds  of  taxes  that  he  could 
obtain.  The  same  method  was  extended  to  other 
taxes  where  there  was  no  similar  necessity  for  it. 
This  farming  of  taxes  was  used  through  the  imperial 
era  of  ancient  Rome,  and  copied  by  France  it  was 
extended  into  modern  times.  The  various  direct 
contributions  of  the  middle  ages  which  were  ap- 
portioned among  the  different  cities,  or  "estates," 
were  frequently  delivered  directly  to  the  Prince  or 
his  Treasurer.  All  of  these  crude  methods  were 
abandoned  as  soon  as  there  was  a  distinct  recogni- 
tion of  the  authority  of  the  taxing  power  over  all 


CHAP,  ii  COLLECTION  341 

the  different  parts  of  the  country  and  over  each 
contributor  individually.  The  apportionment  sys- 
tem, as  originally  used,  was  a  more  or  less  distinct 
recognition  of  the  autonomy,  and  possibly  of  the 
partial  political  independence,  of  the  tax-payers,  be 
they  provinces,  cities,  or  classes  of  individuals. 

SEC.  2.  The  collection  of  the  taxes  is  usually 
the  duty  of  the  regular  fiscal  officers  of  the  general 
administration,  but  industrial  and  commercial  re- 
ceipts are  frequently  collected  by  special  boards  in 
charge  of  them,  who  turn  the  money  over  to  the 
Treasury.  Assessment  and  collection  are  so  closely 
connected  that  they  can  be  "studied  together.  In 
the  collection  of  customs  duties  there  are  two  things 
for  the  officials  to  care  for.  (1)  They  must  look 
out  for  the  arrival  of  all  the  taxable  Gonectionof 
commodities  and  prevent  smuggling,  customs 
(2)  They  must  ascertain  the  value  of  c 
the  goods  if  the  taxes  are  ad  valorem,  and  the  num- 
ber of  pieces  if  specific.  The  invoices,  supported  by 
the  usual  certificates,  oaths,  etc.,  are  of  the  nature  of 
a  declaration  by  the  owner,  or  importer.  They  are 
then  subjected  to  the  scrutiny  of  official  appraisers, 
whose  knowledge  of  the  nature  and  value  of  the 
goods  is  very  accurate.  The  tax  is  then  paid  to  the 
collector  at  the  place  of  importation  or  when  it 
reaches  the  recipient  in  the  interior,  but  before  it 
is  delivered  to  him.  In  case  the  goods  are  to  be 
admitted  into  the  interior  of  the  country,  or  of  the 
customs  district,  before  the  tax  is  paid,  as  is  the 


342         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

case  when  the  person  to  whom  the  goods  are  sent 
resides  in  the  interior,  the  package  is  sealed  up,  or 
"bonded,"  and  the  seals  can  only  be  broken  by  an 
authorised  collector  after  the  payment  of  the  tax. 
In  countries  where  there  are  no  general  tax  collec- 
tors in  the  interior,  this  method  is  not  feasible,  and 
the  goods  are  held  in  the  custom-house  on  the 
boundary  until  the  tax  is  paid.  With  a  few  excep- 
tions this  is  the  practice  of  the  United  States.  But 
in  Germany,  where  there  are  regular  fiscal  officers 
of  the  central  government  in  almost  every  hamlet, 
goods  are  regularly  shipped  to  the  consignee,  and 
the  tax  paid  in  the  interior. 

Jn  the  case  of  excises,  the  factories,  breweries, 
fields,  and  other  places  where  the  taxed  goods  are 
Collection  of  produced  are  subject  to  regular  inspec- 
exdses.  tions  and  are  more  or  less  under  the  con- 

stant supervision  of  the  officials.  The  tax  is 
collected  directly  from  the  producer  or  by  the  sale 
of  stamps  and  licenses. 

SEC.  3.  In  the  case  of  direct  taxes  it  is  the  assess- 
ment that  is  the  most  difficult  part  of  the  process. 
Assessment  of  The  methods  of  assessing  some  of  the 
direct  taxes,  taxes  have  already  been  suggested.  The 
work  consists  of  two  parts.  (1)  It  is  necessary  to 
ascertain  the  base  —  the  persons,  the  property,  or  the 
revenues  subject  to  taxation.  (2)  It  is  then  neces- 
sary to  fix  upon  the  valuation,  or  the  rating  of  the 
base  in  each  particular  case.  The  latter  part  of 
the  process  is  "making  the  assessment."  In  this  the 


CHAP,  ii  COLLECTION  343 

contributor  may  be  called  upon  to  assist,  or  the 
officers  of  the  government  may  proceed  entirely 
alone.  Generally  a  declaration  is  requested,  or  may 
be  required,  from  the  tax-payer,  and  the  officials  then 
investigate  the  truth  of  that  declaration.  In  Europe 
it  is  customary  to  form  assessment  commissions  con- 
sisting of  representatives  of  the  tax-payers  in  the 
district,  who  are  acquainted  with  the  local  con- 
ditions and  act  with  the  officers  of  the  government. 
These  commissions  help  the  regular  officers  of  the 
fiscus  to  make  the  assessment,  or  sit  as  a  sort  of 
court  to  hear  appeals  from  the  assessment  made, 
or  both.  The  final  assessment,  however,  is  made 
by  the  fiscal  officers. 

In  the  American  commonwealths,  the  assessment 
of  the  general  property  tax  is  usually  made  by  a 
board  of  locally  elected  assessors  or  an  Assessment  Oj 
assessor.  The  assessor  calls  for  declara-  the  general 
tions  from  the  different  contributors.  property  tax' 
The  law  in  most  States  imposes  severe  penalties 
for  failure  to  comply  with  the  requirement  of  dec- 
laration, or  for  false  declaration.  But,  nevertheless, 
there  is,  for  the  most  part  (Pennsylvania  is  almost 
the  only  exception),  the  utmost  laxity  in  enforcing 
the  law  concerning  declarations.  Only  the  unusu- 
ally conscientious,  who  voluntarily  come  forward 
with  complete  statements,  are  reached  in  this  way. 
So  general  is  the  habit  of  neglecting  this  duty  that 
it  is  practically  impossible  for  the  assessor,  no  matter 
how  anxious  he  may  be  to  have  the  law  complied 


344         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

with,  to  prosecute  all  the  persons  whom  he  knows 
are  evading  assessment.  The  general  practice  is  to 
Difficulty  of  default  the  declaration  and  allow  the  as- 

°*tedara-  sessor  to  find  out  if  he  can  what  taxable 
tions."  property  the  contributor  has.  If  this 

were  done  by  only  a  few  persons  they  could  easily 
be  brought  to  terms  under  the  existing  laws,  but 
when  nine-tenths  of  the  population  refuse  to  com- 
ply, the  assessor  is  helpless,  and  the  only  effect 
that  follows  from  the  declaration  by  the  few  is  to 
make  the  existing  inequalities  of  the  general  prop- 
erty tax  worse  than  ever.  Real  estate  and  other 
visible  property  is  easily  assessed.  The  officer  has 
at  his  command  the  records  of  titles,  of  deeds,  etc., 
which  he  can  investigate,  and  he  ascertains  the 
value  of  each  piece  from  his  own  personal  observa- 
tion of  prevailing  prices.  As  we  have  seen,  per- 
sonal, intangible  property  escapes  almost  entirely. 
It  would  seem  that  this  difficulty  of  administration 
is  insuperable.  No  merely  severe  methods  of  assess- 
ment will  ever  cure  the  evil. 

Above  the  assessor  in  the  United  States  there  are 
generally  two  boards  of  equalisation,  though  some- 
times only  one.     The  first  board  is  local, 
Equalisation.  . 

covering  the  same  district  as  the  assessor. 
This  hears  appeal  from  the  tax-payers  in  regard  to 
their  assessment.  It  equalises  between  individuals. 
The  second  board  is  for  the  whole  commonwealth, 
and  is  known  as  the  State  Board  of  Equalisation. 
These  boards  are  to  adjust  the  burden  of  State 


CHAP,  ii  COLLECTION  345 

taxation  equally  between  the  different  districts. 
As  has  already  been  explained,  a  local  assessor  may 
make  the  assessment  in  his  district  lower  than  that 
in  the  other  districts.  This  will  not  affect  the 
burden  of  local  taxation,  for  all  that  is  needed  is 
to  raise  the  rate.  But  it  lessens,  if  the  assessment 
stands,  the  burden  which  the  State  taxes  impose. 
These  central  boards  are  of  two  kinds :  (1)  those 
with  power  to  add  to  or  subtract  from  the  assess- 
ment of  each  district,  but  in  such  a  way  as  not  to 
change  the  total  amount;  (2)  those  with  power 
to  change  the  assessment,  even  of  the  individuals, 
and  which  may  and  generally  do  change  the  total 
assessment  of  the  State.  As  these  boards  seldom 
have  sufficient  powers,  and  never  sufficient  informa- 
tion as  to  the  local  conditions,  the  effect  of  their 
action  is  not  all  that  could  be  desired.  The  only 
possible  solution  of  this  difficulty  is  the  separation 
of  local  taxation  from  that  of  the  commonwealths, 
so  that  the  assessment  can  be  made  independently 
for  each. 

SEC.  4.  After  the  assessment  has  been  completed, 
it  is  comparatively  easy  to  make  the  collection.  All 
that  is  needed  is  a  collecting  agent  of  the  treasury 
conveniently  located,  to  whom  the  tax-payers  may 

gO,    or   a   collector  who   goes  to   the   tax-    Convenience 

payers.     The  burden  of  taxation  may  be  °/ the  c°ntrib- 

,  ,   .  -     ,  .  »   utor  to  be  con- 

seriously  increased  if  the  convenience  of  suitedin 
the  tax-payers  is   not  consulted  in  this  collection. 
matter.     The  size  of  the  district  over  which  a  col- 


346         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

lector  has  supervision  will  depend  upon  the  density 
of  the  population.  If  the  collector  is  to  be  sought 
out  by  the  contributors,  it  is  best  that  his  office 
should  be  located  in  some  business  centre  fre- 
quently visited  by  the  contributors.  According  to 
the  principle  of  "certainty  and  convenience,"  the 
taxes  assessed  upon  the  same  person  should  all 
be  entered  in  a  single  bill  and  all  be  payable  to  the 
same  collector.  The  tax-payer  should  be  informed 
as  early  as  possible  of  the  total  amount  of  taxes 
that  he  has  to  pay,  of  the  number  of  instalments 
in  which  they  are  payable,  and  of  the  conditions  of 
delinquency  and  its  penalty.  Some  of  the  American 
commonwealths  disregard  this  rule  entirely.  They 
add  grievously  to  the  burden  of  taxation,  especially 
in  the  country  districts,  where  they  are  already  en- 
tirely out  of  proportion  to  the  ability  of  the  people, 
and  increase  the  irritation  felt  by  the  contributors, 
by  inconvenient  location  of  the  collectors'  office,  and 
by  requiring  the  payment  of  State  and  county  taxes 
to  one  set  of  collectors,  while  the  town  and  other 
municipal  taxes  are  paid  to  a  different  set  and 
upon  separate  bills.  The  most  economical  and 
least  irritating  process  is  to  have  all  the  taxes 
collected  by  the  same  person.1 

SEC.  5.    The  transfer  of  the  public  funds  from  one 

1  The  writer  knows  of  an  instance  where  a  farmer  has  to  travel 
fifty  miles  to  pay  his  State  and  county  taxes,  while  the  local  taxes 
are  collected  within  two  miles  of  his  home.  This  is  not  an  ex- 
treme case. 


CHAP,  ii  CUSTODY  OF  FUNDS  347 

part  of  the  country  to  another  is,  in  modern  times, 
attended  with  little  risk.     It  is  most  conveniently 
done  by  means  of  the  banks  or  the  post  Means  of 
office.     If  the  country  is  sparsely  popu-  transferring 

.    .  ,         „         public  money 

lated  and  insecure,  the  collectors  omce  from  place  to 


should  be  at  or  near  the  bank  or  vault 
in  which  the  money  is  to  be  stored.  In  large 
countries,  as,  for  example,  the  United  States,  it  is 
convenient  to  have  a  number  of  branch  treasuries 
scattered  about  the  country,  at  which  collections  can 
be  made,  and  through  which  money  for  expenditure 
can  be  distributed  to  the  disbursing  officers.1 

The  storage  or  safe-keeping  of  the  funds  is  accom- 
plished in  one  of  three  ways.  (1)  As  in  England, 
a  great  State  Bank  is  made  custodian  of  storage  of  the 
the  funds  which  are  sent  to  it  from  the  public  funds. 
various  collectors  who  deposit  with  its  branches. 
(2)  As  in  France  and  the  United  States,  the  treas- 
ury and  the  sub-treasuries  are  the  chief  custodians 
of  the  funds.2  (3)  As  in  the  commonwealths  of  the 
United  States,  where  (except  in  Indiana,  Ohio,  Cali- 
fornia, Kansas,  Mississippi,  Nevada,  and  Texas)  pri- 
vate or  other  banks  are  made  the  depositories  of  the 
public  moneys.  When  protected  by  proper  safe- 
guards, such  as  the  giving  of  personal  bonds  and 

1  Sub-treasuries  are  at  Baltimore,  Boston,  Chicago,  Cincinnati, 
New  Orleans,  New  York,  Philadelphia,  St.  Louis,  and  San  Fran- 
cisco. 

2  According  to  law,  the  Treasurer  and  disbursing  officers  of  the 
United  States  may  make  deposits  in  the  National  Banks.    About 
$14,000,000  are  regularly  so  deposited. 


348         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

collateral,  the  bank  depository  system  has  proved 
itself  far  safer  and  more  economical  than  the  inde- 
pendent treasury,  which  is  only  to  be  defended  on 
political  grounds,  if  at  all.  The  experience  of  the 
United  States  federal  government  in  the  early  days 
with  "  pet  banks  "  points  to  the  political  difficulties 
of  the  bank  depository  system.  The  bank  deposit 
system  prevents  the  periodic  disturbance  of  the  cir- 
culation by  the  withdrawal  or  storage  of  money.  If 
the  independent  treasury  system  were  used  by  all 
the  departments  of  the  government,  this  disturb- 
ance would  undoubtedly  be  serious  enough  to  affect 
prices.1 

SEC.  6.  The  mere  mechanical  details  of  the 
methods  of  bookkeeping  and  public  accounts  can- 
not be  described  here.  About  all  that  can  be  done 
is  to  make  such  explanation  as  will  enable  the  stu- 
dent to  easily  comprehend  the  published  accounts 
and  statistics  in  their  main  features. 

The  revenue  account  is  generally  very  simple.     It 

contains  items  named  according  to  the  sources  from 

which  they  come.     Care  must  be  taken 

Public  J 

accounts,  in  studying  the  reports  of  the  fiscal  offi- 
ngis  '  cers  on  the  revenues  to  distinguish  the 
receipts  that  represent  income  from  the  receipts  that 
are  merely  formal  transfers  and  bookkeeping  expedi- 
ents. For  example,  the  English  finance  account  of 

1  Cf.  Kinley's  "Independent  Treasury,"  and  Buckley's  "Cus- 
tody of  State  Funds,"  Annals  of  the  American  Academy,  Vol.  VI., 
3,  November,  1895. 


CHAP,  ii  PUBLIC  ACCOUNTS  349 

the  United  Kingdom  for  the  year  ending  March  31, 
1895,  contains  the  following  :  Receipts ;  I.  Balance 
in  Exchequer,  April  1,  1894,  £5,977,118,  18s.  9d. 
II.  Revenues  received  into  the  Exchequer ;  viz., 
Customs,  Excises,  etc.,  £94,683,762,  10*.  2d.  ;  total, 
£100,660,881,  88.  lid.  This  was  what  England  had 
to  draw  on.  But  following  that  appear  a  number 
of  other  "  Exchequer  receipts,"  among  which  are  re- 
payments of  Advances,  as,  (1)  by  the  mint  for  the 
purchase  of  bullion  for  coinage,  £700,000,  represent- 
ing merely  a  return  to  the  Exchequer  of  money 
temporarily  passed  to  the  mint.  The  same  year  the 
Exchequer  advanced  to  the  mint  £615,000,  which 
will  appear  in  1896  as  a  receipt  increased  by  the 
seigniorage.  (2)  The  Exchequer  borrows  money 
temporarily  in  anticipation  of  the  revenues.  This 
appears,  of  course,  as  a  receipt  of  £13,700,000,  but  is 
not  revenue.  (3)  It  renewed  a  number  of  outstand- 
ing bills  and  bonds  amounting  to  £14,123,400. 
These  appear  as  receipts,  offset,  of  course,  by  an 
equal  expenditure.  But  (4)  it  created  an  addi- 
tional debt  of  £760,000,  for  barracks  and  telegraph. 
This  sum  may  fairly  be  called  revenue.  So  that  the 
total  amount  of  money  that  came  as  actual  income 
to  the  treasury  was  £101,420,881,  8s.  lid.  But  the 
total  receipts  foot  up  £130,217,647,  13*.  Sd. 

On  the  expenditure  side,  the  Issues,  or  credits  to 
disbursing  officials,  are  first  the  Consolidated  Fund 
"Services."  That  is,  the  payments  for  (1)  the 
National  Debt  "Services,"  (2)  the  "other  consoli- 


350         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

dated  fund  services,"  which  consist  of  the  civil  list, 
annuities  and  pensions,  salaries  and  allowances,  courts 
of  justice,  miscellaneous  "services,"  the  Exchequer 
contributions  to  Ireland,  and  the  annuity  under 
the  Indian  Army  Pension  Deficiency  act  of  1885. 
After  the  consolidated  fund  "  services,"  which  foot 
up  to  £26,500,000,  come  the  supply  "  services "  for 
the  army,  ordinance  factories,  navy,  and  miscellane- 
ous civil  "services,"  for  the  collection  of  customs 
and  inland  revenue,  post  office,  telegraph,  and  postal 
packet  "services."  These  two  items,  the  consoli- 
dated fund  and  supply  "services,"  contain  all  that 
is  strictly  chargeable  to  the  revenue.  They 
amounted  in  1895  to  £93,918,420,  18s.  4d.  In  ad- 
dition there  were  special  expenditures  of  £ 810,000, 
making  a  total  of  £94,728,420,  18s.  4d.  But  there 
were  a  large  number  of  additional  issues:  (1)  bills 
and  bonds  paid  off  by  receipts  from  new  bills,  (2) 
temporary  advances  repaid,  a  part  of  which  were  for 
deficiencies  in  the  consolidated  fund.  These  and 
one  or  two  other  minor  items,  with  a  balance  of 
£6,300,826, 15s.  4d.,  brought  the  "  Issues  "  up  to  the 
receipts. 

In  studying  the  accounts  published  by  the  Treas- 
ury Department  of  the  United  States,  we  have  dif- 
Pubiic  ferent  difficulties  to  meet.  There  is 

accounts,         generally  a  clear   statement,  free   from 
2tes°  repetitions,  or  transfers,  of  the  revenues 
according    to    the     sources,    and    of     expenditures 
according   to   departments,    or   objects.      The   only 


CHAP,  ii  PUBLIC  ACCOUNTS  351 

difficulties  arise  from  the  peculiar  and  arbitrary 
grouping  of  the  expenditures.  This  comes  from  the 
illogical  distribution  of  duties  among  the  different 
departments  already  referred  to.  Some  of  the 
peculiarities  are  that  the  expenditure  for  the  "  civil 
establishment"  includes  foreign  intercourse,  public 
buildings,  collecting  the  revenues,  deficiency  in 
postal  revenues,  rebate  of  tax  on  tobacco,  refunding 
of  direct  taxes,  French  spoliation  claims,  District  of 
Columbia,  and  similarly  incongruous  items.  Those 
for  the  military  establishment  included  rivers  and 
harbours,  forts,  arsenals,  and  sea-coast  defences.  For 
the  naval  establishment  included  construction  of  new 
vessels,  machinery,  armament,  equipment,  and  im- 
provement of  navy  yards.  Expenses  not  otherwise 
classified  are  generally  listed  as  expenses  of  the 
Treasury  Department. 

SEC.  7.  An  interesting  phase  of  public  bookkeep- 
ing is  the  separation  of  accounts  into  funds.  When 
Parliament  voted  a  tax  it  was  formerlv 

t  A   fi    -4-  A  4-1,         1  The  "funds." 

tor  a  definite  purpose,  and  the  plan  was 
to  reserve  the  whole  of  it  for  the  proposed  purpose. 
But  the  receipts  and  expenditures  of  these  funds 
never  exactly  balanced,  and  simplicity  finally  re- 
quired that  all  should  be  turned  into  the  consoli- 
dated fund.  This  method  of  bookkeeping  is  best  ex- 
hibited to-day  by  the  accounts  of  the  commonwealths 
in  the  United  States,  although  also  used  in  national 
and  municipal  accounts  to  some  extent.  All  the  re- 
ceipts are  distributed  among  various  so-called  "funds," 


352         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

or  accounts,  according  to  some  prearranged  plan.  A 
separate  account  is  kept  of  all  receipts  and  expendi- 
tures belonging  to  each  fund.  With  the  exception 
of  a  few  trust  funds  arranged  to  keep  certain  sums 
inviolate,  these  funds  are,  in  effect,  mere  bookkeep- 
ing contrivances.  With  the  exception  of  the  Gen- 
eral Fund,  which  receives  all  the  money  not  other- 
wise appropriated  to  special  funds,  each  of  these 
accounts  generally  bears  the  name  of  the  expendi- 
ture met  thereby,  sometimes  of  the  revenues  supply- 
ing them.  In  some  commonwealths  the  number  of 
these  funds  is  very  large.1  The  accounts  are  some- 
times complicated  by  transfers  from  one  fund  to 
another,  in  which  case  they  appear  twice  in  the 
account,  and  frequently  swell  the  apparent  receipts 
enormously. 

Local  budgets  are  necessarily  determined  by  the 
frame  of  local  government  and  the  number  of  func- 
Locai  tions  performed  by  each.  Thus  in  Eng- 

accounts.  land  the  public  function  to  be  performed 
constitutes  the  basis  of  local  organisation,  and  until 
the  recent  reforms  each  local  governing  body  had 
only  one  or  two  duties  ;  hence  only  one  or  two  gen- 
eral accounts  of  expenditures,  and  one  or  two 
sources  of  income.  But  in  America  each  local 
governing  body  generally  has  charge  of  all  the 
local  functions  affecting  a  certain  area,  and  may 
have  as  many  expenditures  and  revenues  as  a  com- 

1  See  Seligman,  "  Finance  Statistics  of  the  American  Common- 
wealths," Pub.  Amer.  Statistical  Assoc.,  December,  1889. 


CHAP,  ii  PUBLIC  ACCOUNTS  353 

mon wealth,  or  even  more.  Here  methods  of 
accounting  defy  classification  and  frequently  defy 
sensible  interpretation,  even  by  the  officials  in 
charge.  There  is  a  crying  need  for  reform  here  in 
the  direction  of  uniformity.1 

1  See  in  this  connection  a  form  suggested  for  published  reports 
of  municipalities  by  Prof.  H.  B.  Gardner,  in  the  Pub.  of  the  Amer. 
Statistical  Assoc.,  June,  1889,  and  adopted,  in  part,  by  the  Eleventh 
Census  of  the  United  States,  as  the  basis  of  schedules  and  inquiries 
sent  to  the  municipalities. 

2A 


CHAPTER   III 

FINANCIAL  ADMINISTRATION  OF  WAR  ;  ILLUS- 
TRATED BY  THE  EXPERIENCE  OF  THE  UNITED 
STATES  IN  THE  WAR  WITH  SPAIN 

SECTION   1.    A   serious    war    usually   imposes   a 
sudden,  new  burden  upon  the  treasury,  the   exact, 
or  even  the  approximate,  size  of  which  it  is  not  pos- 
sible to  estimate  at  the  outset.     Many  of 

"Extra-  J 

ordinary"  the  expenses  of  war  belong  to  that  class 
exper  which  financiers  call  "  extra-ordinary  "  to 

distinguish  them  from  the  usual  or  current  expenses 
of  the  government.  The  amount  by  which  the  ordi- 
nary expenses  are.  increased  in  time  of  war  depends 
upon  many  circumstances.  Obviously,  the  chief  fac- 
tor is  the  size  of  the  forces  engaged  and  the  duration 
of  the  struggle.  Naturally,  the  chastisement  of  a 
few  dozen  hostile  Indian  braves  in  the  immediate 
vicinity  of  the  regular  army  posts  involves  practi- 
cally no  "extra-ordinary"  expenses.  Allowance  is 
usually  made  in  the  ordinary  budget  for  the  ex- 
penses a  war  of  that  kind  would  occasion.  But 
many  circumstances  less  obvious  than  the  size  of 
the  forces  engaged  enter  into  the  determination  of 
the  amount  of  the  "extra-ordinary"  expenditures. 
Thus,  for  example,  a  naval  war,  unless  it  happens  to 

354 


CHAP,  in  FINANCES  OF  WAR  355 

become  the  occasion  for  the  purchase  of  new  ships, 
involves  comparatively  little  addition  to  the  ordi- 
nary expenses  of  maintaining  the  navy.  A  country 
which  has  a  large  standing  army  incurs  relatively 
less  "extra-ordinary"  expense  when  engaging  in 
war  than  a  country  which,  like  the  United  States, 
has  only  a  small  regular  army. 

The  ordinary  expenses  being  provided  for  by  the 
regular  budget,  the  financier's  chief  concern  in  time 
of  war  is  the  provision  of  the  "extra-ordinary  "  funds. 
If  the  operations  of  the  war  are  likely  to  interfere  with 
the  ordinary  revenues,  he  must  furthermore  be  pre- 
pared to  treat  a  part  of  the  ordinary  expenses  as 
"extra-ordinary,"  at  least  to  the  extent  of  furnishing 
new  means  to  meet  them.  It  is  not  often  possible, 
and  still  less  often  expedient,  to  curtail  the  ordinary 
expenditures  in  any  way  for  the  purpose  of  saving 
money  to  meet  the  new  expenses.  How  „„ 
to  increase  the  receipts  of  the  treasury  by  presented 
an  amount  sufficient  to  insure  the  efficient  b^  war' 
conduct  of  the  war,  without  too  serious  disturbance 
of  the  industries  and  commerce  of  the  people,  upon 
which  all  the  revenues  depend,  is  the  problem  for 
the  finance  minister  to  solve.  The  "  extra-ordinary  " 
demands  come  thick  and  fast,  especially  at  the  be- 
ginning of  the  war,  and  they  must  be  met,  and  met 
at  once.  The  amount  which  may  be  needed  at  any 
given  time  is  not  ascertainable.  But  in  spite  of 
that,  sufficient  funds  must  always  be  on  hand. 
Upon  this  more  than  upon  any  other  one  thing 


356        INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

depends  the  fate  of  war.  The  war  financier  can 
never  plead  that  he  has  no  funds,  nor  can  he  ask 
for  time  in  which  to  collect.  He  must  have  the 
money  when  it  is  wanted  and  in  the  amounts  re- 
quired. No  degree  of  skill  on  the  part  of  officers, 
or  bravery  on  the  part  of  the  men,  no  degree  of  self- 
sacrifice  at  the  front,  can  compensate  for  failure  on 
the  part  of  the  financier  to  provide  the  ways  and 
means.  His  powers  are,  therefore,  of  the  greatest 
and  most  unusual. 

SEC.  2.  Possibly  the  most  natural  source  to  turn 
to  in  time  of  war  for  the  increased  revenues  needed 
increased  *s  ^e  existing  system  of  taxes.  At  first 
rates  for  thought  it  might  seem  proper  to  attempt 
ces'  to  obtain  new  income  by  raising  the  rates 
of  the  old  taxes.  To  some  extent  this  is  possible. 
In  every  well-arranged  tax-system  there  should  be 
some  taxes  which  can  be  made  to  yield  an  increased 
revenue  by  simply  raising  the  rates.  One  of  the 
chief  reasons  for  the  establishment  and  the  retention 
of  the  British  "property  and  income  tax,"  for  ex- 
ample, is  found  in  the  elasticity  of  the  returns. 
But  not  all  taxes  can  be  treated  in  this  way.  Some- 
times an  increase  in  the  rate  of  taxation  will  disturb 
industry  and  commerce  and  do  a  greater  injury  to 
the  welfare  of  the  people  than  is  received  from  the 
damages  of  war.  Again,  an  increase  in  the  rates 
of  certain  taxes  will  diminish  the  revenue  or  even 
destroy  it  entirely.  In  not  a  few  taxes  the  only  way 
to  increase  the  revenue  is  to  lower  the  rates.  This 


CHAP,  in  FINANCES  OF  WAR  357 

is  the  case  with  most  protective  duties.  Any  change 
in  the  rate  of  such  taxes  is  bound  to  affect  industry 
and  commerce,  and  to  affect  them  unfavourably  in  the 
first  instance,  whatever  the  subsequent  effect  may 
be.  A  war  brings  perplexities  enough  to  business 
without  the  creation  of  artificial  ones,  and  the  finan- 
cier should  not  interfere  with  these  taxes.  It  added 
not  a  little  to  the  perplexities  and  dangers  of  the 
Civil  War  in  the  United  States  that  the  industry  and 
commerce  of  the  people  were  repeatedly  disturbed 
during  the  war  by  changes  in  the  tariff  as  well  as  by 
the  military  and  naval  operations  themselves.  There 
are,  therefore,  but  a  limited  number  of  old  taxes 
from  which  any  aid  can  be  sought.  In  the  United 
States,  owing  to  the  one-sided  system  of  federal 
taxation,  the  number  of  them  is  very  small  indeed. 
The  American  financier  must  look  elsewhere  for  his 
new  revenues. 

SEC.  3.     The    next    resource,   naturally,   is   new 
taxes.     But  the  establishment  of  new  taxes,  or  even 

the  restoration  of  old  taxes  not  in  use  at 

.1.1.    j.-         £  -L-U  •  •  •       New  taxe8- 

the  time  of  the  war,  is  a  matter  requiring 

considerable  time.  Even  if  it  were  an  easy  matter 
to  decide  upon  the  best  form  of  taxation  and  to  get 
the  necessary  authority  from  the  legislative  branch 
of  the  government,  the  organization  of  the  new  ad- 
ministrative forces  for  the  collection  of  the  taxes  is 
a  matter  requiring  time.  No  new  system  of  taxation 
reaches  its  normal  revenue-yielding  powers  within 
many  months  of  its  enactment.  If  the  taxes  are 


358        INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

entirely  new,  the  time  required  is  longer.  But  even 
if  they  are  more  or  less  familiar  to  the  people  from 
use  on  some  previous  occasion,  a  considerable  lapse 
of  time  must  intervene  between  the  beginning  of 
war  and  the  receipt  of  sufficient  new  revenues  to 
meet  any  considerable  part  of  its  expenses.  Fur- 
thermore, the  expenses  of  war  are  now  so  enormous 
that  any  system  of  taxation  which  raised,  or  at- 
tempted to  raise,  the  entire  amount  needed  during 
the  probable  duration  of  the  war  would  be  so  bur- 
densome as  to  crush  the  people.  It  is  therefore 
extremely  unwise,  and  practically  impossible,  to  at- 
tempt to  raise  the  entire  cost  of  the  war  by  immedi- 
ate taxation.  The  only  other  resource  is  borrowing. 
SEC.  4.  The  use  of  the  public  credit,  in  time  of 
war,  is  attended  by  many  special  difficulties.  The 
outcome  of  war  is  always  more  or  less 

The  use  of  J 

credit,  in  uncertain.  Even  if  defeat  would  not  en- 
ar'  tirely  cripple  the  nation's  resources  and 
render  the  repayment  of  the  loan  uncertain,  or  affect 
the  payment  of  interest,  yet  there  are  many  con- 
siderations which  make  the  lender  hesitate.  The 
fact  that  the  duration  of  the  war,  the  extent  to 
which  other  nations  may  become  involved,  and  many 
similar  considerations  affecting  the  size  of  the  total 
demand  upon  the  public  credit  are  unknown,  vastly 
increases  the  difficulty  of  placing  a  loan  on  favourable 
terms.  But  on  that  very  account  it  is  particularly 
necessary  for  the  successful  administration  of  the 
war  that  everything  should  be  done  to  strengthen 


CHAP,  in  FINANCES  OF  WAR  359 

and  preserve  the  nation's  credit.  There  may  come 
a  time  in  the  progress  of  the  war  when  the  only 
source  from  which  any  funds  can  be  had  is  the 
money  market.  If,  therefore,  the  financier  has  done 
anything  to  weaken  the  nation's  credit  at  the  begin- 
ning of  the  war,  he  is  apt  to  be  helpless  at  the  close. 
Credit  tends  to  weaken  as  debt  increases. 

It  is  for  this  reason  that  resort  is  frequently 
had  in  early  war-borrowings  to  the  simplest  and 
most  primitive  method  of  debt-making;  prou^ono/- 
namely,  that  which  provides  revenues  for  revenues  to 

.  preserve 

the  payment  of  the  interest  and  the  re-  public 
payment  of  the  principal  at  the  very  time  credlt- 
the  debt  is  contracted.  The  creditor  sees  in  the 
new  funds  flowing  into  the  treasury  the  security  for 
his  advances,  and  the  guarantee  of  good  faith  on  the 
part  of  the  government.  So  long  as  every  new  loan 
is  accompanied  by  new  taxes  from  which  its  cost  can 
be  met,  the  public  credit  is  practically  secure.  -  But 
if,  on  the  other  hand,  the  government  neglect  this 
precaution  during  the  first  stages  of  the  war,  any 
attempt  to  resort  to  it  at  a  later  stage  is  apt  to  be 
regarded  as  the  desperate  device  of  unsound  financial 
management  and  the  presage  of  coming  bankruptcy. 

Public  credit  is  a  plant  of  slow  growth  and  ex- 
tremely tender.  It  withers  in  a  day  before  a  breath 
of  doubt. 

Inasmuch  as  a  successful  outcome  cannot  be  hoped 
for  in  modern  warfare  without  the  funds  obtainable 
solely  by  public  borrowing,  and  the  necessity  for 


360         INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

Joans  increases  the  longer  the  war  continues,  it  be- 
hooves the  modern  war  financier  to  guard  the 
nation's  credit  as  his  most  precious  treasure.  No 
sacrifice  is  too  great  which  will  strengthen  it  and 
preserve  it  intact  for  the  later  stages  of  the  war. 

SEC.  5.  Such,  stated  in  condensed  form,  are  the 
general  principles  which  should  guide  the  fiscus  in 
time  of  war.  No  better  illustration  of  the  applica- 
tion of  these  principles  can  be  found  in  history  than 
is  afforded  by  the  operation  of  the  United  States 
Treasury  during  the  recent  war  with  Spain  ;  and  by 
following  in  some  details  the  story  of  that  war,  we 
can  obtain  a  clearer  view  of  the  principles  them- 
selves. 

The  situation,   as   it   confronted  Secretary  Gage 

when   the   news   of   the   destruction   of  the  Maine 

reached  Washington,  may  be  summarized 

The  situa-  J 

tionofthe  somewhat  as  follows:  The  Treasury  had 
states  a  balance  on  hand  of  about  $225,000,000. 


Treasury       gu^    £§   we   shall   see   below,  only  about 

at  the  out- 

break of  the  125,000,000  of  this  was  really  available 
for  immediate  use  in  the  prosecution  of 
the  war.  The  ordinary  expenditures  of  the  govern- 
ment, outside  of  those  for  the  postal  system,  which 
is  nearly  self-supporting,  amounted  in  round  num- 
bers to  $350,000,000  per  annum.  For  the  first  time 
in  many  months  these  expenses  were  being  nearly 
met  by  the  revenues.  Indeed,  it  was  estimated  that 
at  the  ordinary  rate  of  expenditures  there  might  be 
a  slight  surplus  at  the  end  of  the  year,  The  tariff 


CHAP.  Ill 


FINANCES  OF  WAR  361 


was  expected  to  yield  about  $200,000,000,  the  inter- 
nal revenue  taxes  about  $165,000,000,  and  there  were 
about  $25,000,000  to  be  expected  from  miscellaneous 
sources. 

SEC.  6.  The  larger  part  of  the  income,  however, 
came  from  taxes  which  could  not  well  be  tampered 
with.  The  tariff  had  been  so  long  a  subject  of  con- 
troversy that  there  was  little  desire  to  , 

The  tariff 

alter  its  recent  settlement.  For  reasons  could  not 
already  made  clear,  there  were  many  parts 
of  the  tariff  which  could  not  well  be  changed. 
Except  in  a  very  few  instances,  the  income  to  be 
obtained  from  it  would  not  be  increased  by  raising 
the  rates.  In  the  great  majority  of  instances  to 
raise  the  ratfcs  would  have  been  to  lessen  the  re- 
ceipts, while  to  lower  those  rates  for  the  purpose 
of  increasing  the  income  by  allowing  larger  importa- 
tions would  have  been  to  remove  the  protection 
afforded  by  them.  This  was  contrary  to  the  avowed 
policy  of  the  administration.  It  would,  moreover, 
have  served  to  disturb  industry  and  to  perplex  its 
leaders  at  a  time  already  sufficiently  disquieting, 
and  might  have  proved  but  an  aggravation  of  the 
disturbance  caused  by  the  war.  The  great  body 
of  the  customs  rates,  of  which  there  are  thousands 
on  the  tariff  schedules,  are  not  productive  of  much 
revenue  and  are  not  intended  to  be.  They  are  there 
to  restrict  importations.  These  certainly  could  not 
well  be  changed.  Of  the  bare  dozen  or  so  of 
articles  of  importation  which  do  yield  a  reve- 


362        INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

nue,  sugar,  one  of  the  most  important,  was  likely  to 
be  interfered  with  by  the  war.  At  the  existing 
rates,  sugar  imported  should  yield  a  revenue  of 
about  $80,000,000  a  year,  but  at  least  half  of  the 
importation  was  jeopardised  by  the  war  itself,  and 
it  would  have  been  highly  impolitic  to  have  changed 
the  rate  at  this  time.  Iron,  which  was  once  a  source 
of  considerable  revenue,  was,  in  consequence  of  the 
changes  which  have  taken  place  in  that  industry, 
and  of  the  protective  features  of  the  customs  law, 
not  available  to  provide  new  revenues,  as  the  im- 
portations are  at  best  small.  Cotton  goods,  the  tax 
upon  which  yields  considerable  revenue,  were  pro- 
tected; so  were  manufactures  of  hemp,  flax,  and 
jute,  of  leather  and  of  wool.  Dru^b,  medicines, 
and  chemicals  were  already  taxed  up  to  the  limit 
of  productiveness,  from  a  revenue  point  of  view.  In 
short,  there  were  but  four  important  articles  im- 
ported which  might  be  used  to  yield  additional 
revenue.  These  were  hides  and  skins,  raw  silk, 
tea  and  coffee.  To  tax  hides  and  skins  or  raw  silk 
would,  probably,  under  the  prevailing  theory  of 
"  compensatory  "  duties,  have  involved  an  increase 
in  the  rates  on  the  products  manufactured  from 
them,  to  maintain  the  same  degree  of  protection 
that  those  products  now  enjoy.  That  would  have 
reopened  the  whole  tariff  controversy,  and  have  ren- 
dered the  outcome  of  the  war  revenue  measure 
extremely  doubtful.  Clearly  it  were  wisest,  con- 
sidering how  recently  the  tariff  issue  had  been  tern- 


CHAP,  in  FINANCES  OF  WAR  363 

porarily  settled,  to  leave  them  alone.  As  a  matter 
of  fact,  then,  there  are  only  two  articles  in  the  whole 
list  of  importations  which  might  be  considered  by 
the  Secretary  of  the  Treasury  in  his  search  for  new 
income.  These  were  tea  and  coffee,  which  might, 
perhaps,  have  been  made  to  yield  together  nearly 
180,000,000  additional  revenue.  That  was  approxi- 
mately all  that  could  be  expected  from  the  tariff. 

In  the  war  revenue  bill,  as  presented  to  the  House 
of  Representatives  by  the  Committee  on  Ways  and 
Means,  of  which  Mr.  Dingley  was  chair-  The  tax 
man,  there  was  no  suggestion  of  using  ontea- 
the  tariff  in  any  way  for  obtaining  additional  reve- 
nue. It  was  not  until  the  very  end  of  the  long 
discussion  of  'the  measure  in  the  Senate  that  it  was 
proposed  to  put  a  duty  of  ten  cents  a  pound  on  tea. 
That  measure  passed  the  Senate  and  was  accepted 
by  the  conference  between  the  two  Houses  and  by 
the  House  of  Representatives  without  any  public 
discussion  as  to  its  merits.  The  reason  for  this 
duty,  as  for  the  omission  of  coffee  from  the  list,  is 
therefore  not  clear.  The  tax  on  tea  is  an  important 
matter.  The  yield  will  be  over  $10,000,000  per 
annum.  A  similar  tax  on  coffee,  which  would  have 
been  at  the  rate  of  8.5  cents  per  pound,  would  have 
yielded  about  $70,000,000  more.  It  is,  therefore, 
somewhat  surprising  that  it  should  have  attracted 
so  little  attention  from  the  members  of  Congress. 

SEC.  7.    Since  the  revenue  from  the  tariff  was  not 
to  be  increased,  the  only  resource  available  was  in- 


364        INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

ternal  taxes.  That  these  internal  taxes  should  have 
taken  the  same  general  form  as  the  taxes  used  dur- 
The  main  ing  the  Civil  War,  and  consequently  more 
int°ernaeiWaS  OT  less  familiar  to  people  and  officers,  was 
taxation.  but  natural.  Under  the  stress  of  war 
it  is  unwise  to  attempt  to  organise  entirely  new 
taxes,  such,  for  example,  as  an  income  tax.  Though 
an  income  tax  had  been  used  during  the  Civil  War, 
that  form  of  taxation  was  under  the  shadow  of  an 
adverse  decision  from  the  Supreme  Court.  Even  if 
an  income  tax  law  which  would  have  been  constitu- 
tional, according  to  the  recent  decision  of  the  court, 
could  have  been  drawn,  it  is  doubtful  whether  it 
could  have  been  made  productive  within  any  rea- 
sonable period  of  time.  Recourse  might  have  been 
An  income  ^a(^  ^°  Direct  taxes,  apportioned  among 
tax  and  the  States  according  to  population.  These 
not  avail-  taxes  could  then  have  been  raised  in  any 
able'  manner  which  the  State  authorities  chose. 

But  there  are  two  fatal  objections  to  this  plan. 
The  apportionment  of  taxes  according  to  popula- 
tion is  fundamentally  unjust  and  unequal.  What 
it  amounts  to  practically  is  a  graduated  poll-tax. 
The  different  commonwealths  vary  so  in  wealth  per 
capita  that  any  per  capita  tax,  however  raised,  would 
be  unfair.  Although  the  census  estimate  of  wealth 
in  1890  was  anything  but  satisfactory,  yet  the  method 
used  in  that  estimate  was  uniform  throughout  the 
country ;  and  such  differences  as  that  between  South 
Carolina,  with  about  $350  per  capita,  and  Nevada, 


CHAP,  in  FINANCES  OF  IV AR  365 

with  $4,000  per  capita,  show  how  utterly  inadequate 
the  constitutional  method  of  raising  direct  taxes  has 
become.  Then,  again,  the  method  of  taxation  by 
which  most  of  the  States  raise  their  revenues,  and 
which  they  would  probably  follow  in  raising  their 
share  of  any  apportioned  taxes,  is  the  worst  in  use 
in  any  civilised  country,  and  the  injustice  of  the 
apportionment  would  have  been  enormously  in- 
creased by  the  injustice  in  collection.  The  second 
objection  to  this  method  of  raising  direct  taxes 
prescribed  by  the  constitution  is  that  it  takes  an 
inordinate  length  of  time,  and  war  taxes  should 
begin  to  yield  a  revenue  as  early  as  possible. 

The  only  available  plan  was,  therefore,  to  seek 
additional  revenue  from  the  existing,  indirect,  inter- 
nal taxes,  the  excises  or,  as  they  are  called  , 

'  Description 

in  the  United  States,  the  "internal  reve-  of  the  new 
nue  "  taxes,  and  to  supplement  these  still 
further  by  new  taxes  of  the  same  sort.  Briefly  sum- 
marised the  revenue  bill  nearly  doubled  the  existing 
rate  of  taxation  upon  beer  and  other  similar  fer- 
mented liquors ;  it  imposed  special  taxes  on  bankers, 
brokers,  pawnbrokers,  theatres,  circuses  and  other 
shows,  bowling-alleys  and  billiard  rooms  ;  it  raised 
the  rates  on  tobacco  of  all  kinds  ;  and  it  placed  stamp 
taxes  on  stocks  and  bonds,  commercial  papers,  legal 
documents,  checks  and  drafts,  proprietary  medicines, 
toilet  articles,  bills  of  lading,  insurance  policies,  and 
a  number  of  other  things.  Special  direct  taxes 
were  imposed  on  the  oil-trust  and  the  sugar-trust, 


366        INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

and  on  legacies  and  distributive  shares  of  personal 
property. 

SEC.  8.  As  the  war  revenue  bill  passed  the  House 
its  probable  yield  was  variously  estimated  at  from 
Yield  of  190,000,000  to  $105,000,000  per  annum, 
new  taxes.  ^he  former  being  the  better  estimate.  As 
amended  in  the  Senate  and  finally  adopted,  it  prom- 
ised to  yield  at  least  1150,000,000  per  annum.  The 
actual  yield  in  addition  to  the  regular  revenue  dur- 
ing the  first  month  was  about  $13,000,000.1  But 
the  expenses  of  war  during  the  first  few  months,  if 
not  for  a  long  time  after  that,  would  be,  it  was 
estimated,  at  least  double  that  sum  and  possibly 
more.  Therefore,  unless  the  Treasury  had  a  con- 
siderable balance  on  hand,  there  would  have  been 
no  possibility  of  conducting  the  war  at  all  without 
immediate  loans.  The  balance  in  the  Treasury  at 
the  outbreak  of  the  war  was  $225,000,000.  Upon 
Thefunds  this  were  a  number  of  claims,  some  of 
available.  which,  however,  were  not  immediate. 
$100,000,000,  known  as  the  gold  reserve,  had  to  be 
held  for  the  preservation  of  the  parity  of  all  parts  of 
the  circulation  and  the  avoidance  of  general  financial 

1  It  is  not  possible  and  probably  never  will  be  possible  to  state 
exactly  how  much  the  new  taxes  have  increased  the  revenues.  In 
the  first  place,  the  reports  do  not  segregate  the  income  obtained 
from  the  new  taxes,  from  that  obtained  from  the  old ;  and  in 
the  second  place,  the  changes  in  the  rates,  and  the  existence 
of  new  taxes  have  changed  the  yield  of  the  older  parts  of  the 
system  by  an  amount  which  cannot  even  be  estimated.  The 
total  increase  in  the  revenues  for  the  fiscal  year  1899  over  1898 
was  about  $115,000,000. 


CHAP,  in  FINANCES  OF  WAR  367 

ruin.  Then  there  were  $13,000,000  of  fractional 
silver  and  minor  coins,  a  large  part  of  which  was 
worn  and  unavailable,  while  the  rest  was  needed 
for  currency  purposes  throughout  the  country. 
$14,000,000  had  been  received  from  the  sale  of 
the  Pacific  Railroads;  but  although  this  sum  was 
temporarily  available  it  would,  if  it  were  spent, 
be  necessary  to  raise  an  equivalent  amount  before 
January  first  to  meet  the  Pacific  Railroad  bonds 
which  came  due  at  that  time.  $33,000,000  were 
held  in  trust  for  the  redemption  of  the  notes  of 
national  banks  which  had  failed  or  which  were 
redeeming  their  circulation.  A  part  of  this  was 
temporarily  available,  but  it  would  be  necessary  to 
replenish  that  fund  at  an  early  date  if  much  were 
drawn  from  it.  There  were  then,  out  of  the  $225,- 
000,000,  $160,000,000,  of  which  a  small  part  only 
was  available,  and  that  but  for  a  short  time.  Any- 
thing drawn  upon  that  would  have  to  be  replaced 
by  January  first  at  latest.  Of  the  $65,000,000 
remaining,  $40,000,000  were  necessary  as  the  cash 
on  hand  for  the  ordinary  operations  of  the  govern- 
ment. That  amount  corresponds  to  the  cash  on 
hand  which  a  merchant  keeps  in  the  till  to  make 
change  or  to  meet  small  bills.  This  left  but 
$25,000,000  for  the  initial  expenses  of  the  war, 
which  in  the  state  of  unpreparedness  would  naturally 
be  above  the  average.  This  $25,000,000  was  all  the 
unincumbered  money  in  the  Treasury  to  meet  the 
appropriation  of  $50,000,000  made  by  Congress 


368        INTRODUCTION  TO  PUBLIC  FINANCE     FART  rv 

before  war  was  declared.  It  was  clear  that  the 
Secretary  of  the  Treasury  could  not  provide  the 
sinews  of  war  without  the  power  to  borrow,  both 
for  a  short  time,  to  anticipate  the  revenues  expected 
from  the  new  taxes,  and  for  a  long  time  to  enable 
him  to  support  any  naval  and  military  operations 
which  might  become  necessary,  however  extensive.  • 
SEC.  9.  After  much  discussion  and  more  or  less 
unnecessary  and  dangerous  delay,  especially  in  the 
Senate,  Congress  authorised  the  borrow- 

Authority 

to  borrow       ing,  at  the  discretion  of  the  administra- 

granted.          ^^   ^    ^    ^^Q    ^^    $100,000,000    at 

one  time  on  Treasury  certificates  and  of  an  amount 
not  to  exceed  $400,000,000  on  10-20  bonds  at  3  per 
cent.  Nominally,  therefore,  the  Secretary  of  the 
Treasury  had  in  his  hands  for  the  necessities  of  war 
during  the  first  six  months  of  its  duration  : 

Surplus  on  hand        ....  $  25,000,000 

War  revenues 75,000,000 

Temporary  loans        ....     100,000,000 
Bonds         .        .        .        .        .        .     400,000,000 


Total $600,000,000 

Practically,  he  was  limited  by  the  fact  that  all  of 
this  money  had  not  been  appropriated,  and  it  would 
have  been  folly  to  raise  more  than  he  had  authority 
to  spend.  Including  the  $50,000,000  appropriated 
before  the  war  broke  out,  the  total  war  appropriations 
made  by  Congress  before  it  adjourned  amounted  in 
all  to  $361,788,095.11,  This  sum  covered  the  most 


CHAP,  in  FINANCES  OF  WAR  369 

generous  estimates  of  the  probable  cost  of  the  war. 
But  the  Secretary  did  not  deem  it  necessary  to  raise 
at  once  a  sum  equal. to  the  total  appro-  Determine^ 
priations.  It  was  estimated  that  the  ex-  JJJJJ^JJj^ 
penses  for  the  first  six  months  would  not  borrowed. 
exceed  $175,000,000,  or  about  one-half  of  the  appro- 
priations. The  new  taxes  would  probably  yield 
about  175,000,000  toward  these  necessities,  and  a 
loan  of  1100,000,000  would  possibly  have  sufficed 
to  meet  all  the  demands.  But  the  Treasury  raised 
$200,000,000  by  the  sale  of  3  per  cent  10-20 
bonds,  obtaining  a  total  of  $275,000,000,  or  nearly 
$100,000,000  in  excess  of  the  probable  actual  ex- 
penditure. The  accumulation  of  this  surplus  was 
not  in  any  sense  an  extravagant  or  useless  piece  of 
financiering.  As  has  already  been  explained,  the 
Treasury  must  be  prepared  to  meet  any  demand 
that  may  arise,  instantly  and  amply.  That  is  the 
imperative  necessity.  As  the  early  close  of  the  war 
could  not  have  been  foreseen,  the  fiscal  preparations 
were  necessarily  liberal.  Indeed,  the  amplitude  of 
the  funds  available  was  one  of  the  most  potent 
causes  of  the  success  of  the  war.  The  excess  raised 
was  not  larger  than  was  necessary  to  insure  the 
instant  readiness  of  the  Treasury  to  meet  all  pos- 
sible demands.  Had  the  war  continued  and  the 
demands  equalled  the  appropriations,  the  Treasury 
would  again  have  been  obliged  to  use  its  power 
of  borrowing  which  the  fortunate  termination  of 
the  war  rendered  unnecessary. 
2s 


370        INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

SEC.  10.    It  now  remains  to  see  how  the  credit  of 

the  nation  was  protected  and  how  it  stood  the  strain. 

At  the  end  of  April,  1898,  the  interest-bearing  debt 

of  the  United  States  amounted  in  round  numbers  to 

1847,000,000.     $100,000,000  of  this  bore 

Use  of  the        .  . 

power  to        interest    nominally    at    5    per    cent,   the 
balaace  at  4     er  cent-      The 


of  the  public  bonds,  payable  in  1925,  were  quoted,  when 

credit. 

the  plans  were  being  made  for  placing  the 
new  loan  at  117J.  At  that  rate  they  would  yield 
the  investor  3^  per  cent  interest.  There  was,  there- 
fore, some  surprise  when  it  was  proposed  to  place 
the  new  loan  at  3  per  cent.  It  was  urged  that 
nobody  would  buy  the  new  bond  at  3  per  cent 
when  he  could  buy  one  of  the  old  ones  and  get 
3^  per  cent.  Yet  the  outcome  showed  the  wis- 
dom of  the  move.  The  bonds  were  subscribed  to 
seven  times  over,  and  in  a  short  time  rose  to  a  pre- 
mium of  103  and  105.  In  fact,  the  entire  loan  was 
easily  placed  on  far  better  terms  than  any  nation 
has  ever  before  been  able  to  obtain  in  time  of  war. 
This  remarkable  result  was  attained  partly  by  reason 
of  the  fact  that  the  loan  was  offered  for  popular 
subscriptions  and  the  bonds  were  for  small  amounts, 
thus  creating  and  reaching  a  new  market  among 
investors  of  small  means.  In  part,  too,  it  was  due 
to  the  fact  that  the  new  bonds  at  par  really  formed 
a  better  basis  for  the  national  bank-note  circulation 
than  the  old  bonds  at  117J,  and  very  much  better 
than  the  old  bonds  at  123^,  the  price  which  was 


CHAP,  ill  FINANCES  OF  WAR  371 

reached  before  the  new  issue  was  completed.  An 
investment  by  a  national  bank  of  $100,000  in  the  old 
bonds  at  117£  would  yield  a  profit  of  1736.70  on  the 
circulation,  if  interest  is  at  6  per  cent ;  while  an 
investment  of  the  same  amount  in  the  new  bonds 
at  par  would  yield  a  profit  on  the  circulation  of 
11,302.02.  The  difference  in  favour  of  the  new 
bonds  was  $565.32,  or  over  half  of  1  per  cent. 
The  advantage  was  still  greater  when  the  old  4's 
reached  127J,  as  they  did  before  the  close  of  the 
war.  None  of  these  influences,  however,  would  have 
had  any  weight  had  it  not  been  that  new  revenues 
sufficient  to  meet  all  debt  charges  and  part  of  the 
war  expenses  had  been  provided. 

SEC.  11.  Much  interest  centres  around  the  suc- 
cessful attempt  to  make  this  a  popular  loan,  and 
as  this  was  one  of  the  features  which  A  "P0pu- 
contributed  to  strengthen  the  credit  of  lar" loan' 
the  country  at  this  time,  we  may  examine  it  some- 
what in  detail.  Congress,  after  much  discussion, 
finally  provided  that  these  3  per  cent  bonds,  "re- 
deemable in  coin  at  the  pleasure  of  the  United 
States  after  ten  years  from  the  date  of  their  issue, 
and  payable  twenty  years  from  that  date,"  should 
"be  first  offered  at  par  as  a  popular  loan  under 
such  regulations,  prescribed  by  the  Secretary  of  the 
Treasury,  as  will  give  opportunity  to  the  citizens  of 
the  United  States  to  participate  in  the  subscriptions 
to  such  loan,  and  in  allotting  such  bonds  the  several 
subscriptions  of  individuals  shall  be  first  accepted, 


372         INTRODUCTION  TO  PUBLIC  FINANCE     PART  IV 

and  the  subscriptions  for  the  lowest  amounts  shall 
be  first  allotted."  Before  the  bill  was  finally  passed, 
offers  had  been  made  by  various  banking  houses 
to  take  the  whole  issue  at  a  slight  premium.  Both 
Congress  and  the  administration,  however,  favoured 
the  experiment  of  interesting  a  large  number  of 
small  property-owners  in  the  loan,  even  at  a  loss 
to  the  government.  It  was  thought  that  such  a 
measure  would  strengthen  the  national  credit  by 
giving  expression  to  the  faith  of  our  own  people 
in  the  integrity  of  the  government.  Other  con- 
siderations of  a  political  character  also  entered  in, 
but  with  them  we  are  not  concerned.  As  a  financial 
measure  for  the  strengthening  and  support  of  the 
public  credit  it  proved  a  phenomenal  success. 

The  bonds  were  issued  in  denominations  as  low 
as  $20.  Subscriptions  were  received  through  the 
post-office,  and  every  bona  fide  subscription  under 
$500  was  immediately  accepted.  More  than  half 
of  the  entire  issue  was  taken  by  230,000  of  these 
small  subscriptions,  and  no  subscription  of  more 
than  $4,500  was  accepted.  In  all  320,000  persons 
offered  or  made  subscriptions,  and  the  total  amount 
tendered  the  government  was  $1,400,000,000.  This 
rush  for  the  new  bonds  was  not  merely 

The  rush  J 

for  the  new  a  matter  of  patriotism  or  sentiment. 
During  the  progress  of  the  subscriptions 
the  price  of  the  bonds  advanced  first  to  102  and 
finally  to  105|.  They  now  stand  at  about  110. 
The  lucky  individuals  whose  subscriptions  were 


CHAP,  in  FINANCES   OF  WAR  373 

accepted  made  from  3  per  cent  to  5  per  cent  in  a 
few  days.  The  popularity  of  these  bonds  was 
greatly  enhanced  by  the  standing  offers  obtained 
by  Secretary  Gage  from  two  syndicates  to  take  the 
entire  loan  or  any  part  of  it  that  was  not  covered  by 
the  popular  subscriptions. 

This  method  of  floating  the  loan  will  cost  the 
government  a  considerable  sum  of  money.  In  the 
first  place,  a  possible  premium  is  lost.  How  much 
that  premium  would  have  been  cannot 

The  cost  of 

be  estimated  because  the  bonds  were  sold  the  popular 
in  a  broader  market  than  would  have 
otherwise  existed.  But  it  would  have  been  at  least 
2  per  cent,  for  even  at  a  higher  rate  the  bonds 
offer  a  favourable  basis  for  national  bank-note 
circulation.  That  is,  at  least  $4,000,000  was  lost 
at  the  beginning.  Then  the  cost  of  handling  the 
loan,  paying  the  interest,  etc.,  is  increased  consid- 
erably by  the  small  size  of  the  bonds  and  the  large 
number  of  holders.  It  is  just  as  much  trouble  to 
pay  the  15  cent  coupon  of  a  $20  bond  as  it  is  to  pay 
the  $75  coupon  of  a  $10,000  bond.  Yet  in  spite  of 
all  this,  the  placing  of  the  $200,000,000  loan  of  1898 
was  one  of  the  most  successful  pieces  of  financiering 
ever  accomplished  by  the  government.  It  demon- 
strated the  perfect  solvency  of  the  government;  it 
gave  the  country  a  financial  prestige  which  went  a 
long  way  toward  hastening  the  end  of  the  war; 
and  it  so  strengthened  credit  of  the  government 
that,  had  the  war  unfortunately  continued,  it  would 


374        INTRODUCTION  TO  PUBLIC  FINANCE     PART  iv 

have  been  able  to  obtain  funds  to  almost  any  amount 
on  the  most  favourable  terms  imaginable.  With  a 
3  per  cent  bond  selling  at  105  during  the  actual  con- 
tinuance of  military  operations,  a  nation  may  safely 
regard  its  credit  as  unimpaired. 

The  final  test  of  the  success  of  the  financial 
administration  of  a  war  is  the  preservation  of  the 
public  credit. 


BRIEF  BIBLIOGRAPHY  FOR  ADVANCED 
STUDENTS 

ADAMS,  H.  C.    Public  Debts.    N.Y.,  1887. 

ADAMS,  H.  C.     The  Science  of  Finance.     N.Y.,  1898. 

BASTABLE,  C.  F.     Public  Finance,  2d  ed.  enl.     Macmillan  and 

Co.,  1895. 
COBDEN    CLUB    ESSAYS.     Local   Government  and  Taxation. 

London  and  N.Y.,  1875. 
COHN,  G.     System  der  Nationaloekonomie,  2ter  Band,  Finanz- 

wissenschaft.     Stuttgart,   1889.      Partial    Translation   by 

Veblen,  T.  B.     Chicago,  1895.     [Economic  Studies  of  the 

University  of  Chicago.] 

COOLEY,  T.  M.    Law  of  Taxation,  2d  ed.  enl.     Chicago,  1886. 
COSSA,  L.     Primi  elemente  di  scienza  delle  finanze,  3d  ed. 

Milan,  1882.     Translation  by  Horace  White,  with  notes. 

N.Y.  and  London,  1891. 
DOWELL,   S.     History  of  Taxation   and  Taxes  in  England. 

4  Vols.     2d  ed.     London  and  N.Y.,  1885. 
ELY,  R.  T.  and  FINLEY,  J.  H.     Taxation  in  American  States 

and  Cities.     N.Y.,  1888. 

GOSCHEN,  G.  J.     Reports  and  Speeches  on  Local  Taxes.     Mac- 
millan and  Co.,  1872. 
HOCK,  C.  F.  VON.     Finanzen  und  die  Finanzgeschichte  der 

Vereinigten  Staaten  von  Amerika.     Stuttgart,  1867. 
LEROY-BEAULIEU,  P.    Traite  de  la  Science  des  Finances.    5eme 

ed.     Paris,  1892. 
MARZANO,  F.     Compendio  di  scienza  delle  finanze.     2d  ed. 

Turin,  1887. 
McCuLLOCH,  J.  R.     Taxation  and  the  Funding  System.     3d 

ed.     London,  1863. 
DE  PARIEU,  F.  E.     Traitd  des  impdts.     5  tomes.     Paris,  1862. 

[First  edition  in  five  volumes  better  than  the  second  in  four, 

1866-7.] 

375 


376     BIBLIOGRAPHY  FOR  ADVANCED  STUDENTS 

RAU,   K.    H.      Grundsatze    der    Finanzwissenschaft.     3d    ed. 

Heidelberg,  1850. 
ROSCHER,  W.     System  der  Finanzwissenschaft.     3d  ed.  enl. 

Stuttgart,  1886. 

SAY,  L.,  Editor.     Dictionnaire  des  finances.     Paris,  1883-1892. 
SCHONBERG,  G.,  Editor.     Handbuch  der  National  Oekonomie, 

3ter  Band.     Tiibingen,  3d  ed.,  1890. 
SCHWAB,  J.   C.     History  of  the  New  York  Property  Tax. 

American  Economic  Assoc.,  1890. 
SELIGMAN,  E.  R.  A.     Essays  -in   Taxation.     Macmillan  and 

Co.,  1895. 

SELIGMAN,  E.  R.  A.     Finance  Statistics  of  the  American  Com- 
monwealths.    Boston,  American  Statistical  Assoc.,  1889. 
SELIGMAN,  E.  R.  A.      Progressive   Taxation   in   Theory  and 

Practice.     American  Economic  Assoc.,  1894. 
SELIGMAN,  E.  R.  A.     Shifting  and   Incidence   of   Taxation. 

2d  ed.,  enl.     The  Macmillan  Company,  1899. 
STEIN,  L.  VON.     Lehrbuch  der  Finanzwissenschaft.     5te  Auf- 

lage.     Leipzig,  1885. 
VIGNES,  E.     Traite  des  impots  en  France.     2  tomes.     Paris, 

1880. 
WAGNER,  A.     Finanzwissenschaft.     Leipzig,  Vol.  I.  3d  ed., 

1883;  Vol.  II.  2d  ed.,  1890;  Vol.  III.,  1889.     [Publication 

still  continuing.] 
WILSON,  A.  J.     The  National  Budget,   the  National  Debt, 

Taxes  and  Rates.     English   Citizen  Series.     Macmillan 

and  Co.,  1882. 

OTHER  BIBLIOGRAPHIES 

[Most  of  the  larger  treatises  mentioned  above  contain  numer- 
ous references  and  many  bibliographies.  The  three  following 
lists  of  books  are  easily  available  for  English  and  American 
students.] 

White's  translation  of  Cossa's  Taxation.     Pp.  181-193. 
Bowker  and  lies.     Readers'  Guide  in  Economic,  Social  and 

Political  Science.     Putnam,  1891.     Pp.  66-73. 
Seligman's  Essays  in  Taxation.     Pp.  62,  63,  and  263,  264. 


INDEX 


Abatement,  239. 

Ability,  84,  141.    See  Faculty. 

Accounts,  English,  348 ;  local,  352 ; 
United  States,  350. 

Acquisition,  93. 

Activities  of  the  State,  13.  See 
State. 

Adams,  H.  C.,  6,  295  n. 

Administrative  expenditure,  33 ; 
conception  of  direct  taxes,  88; 
fees,  95,  263. 

Ad  valorem,  191.    See  Customs. 

Aids,  71,  132. 

Alcoholic  liquors,  175.  See  Li- 
censes. 

American  tax  system,  162  ff.    See 

'  General  property  tax. 

Amortisation.    See  Redemption. 

Ancient  revenues,  69.  See  Greece 
and  Rome. 

Annuities,  304.    See  Debts. 

Apportioned  rate,  101 ;  taxes,  94. 

Apportionment  in  France,  158. 

Aristotle,  17. 

Arizona,  assessment  in,  213. 

Army  organisation,  44. 

Art,  galleries,  50 ;  of  public  finance, 
3. 

Ashley,  W.  J.,  115  n. 

Assessment,  103,  213;  of  direct 
taxes,  342 ;  of  excises,  175 ;  of 
general  property  tax,  210;  in 
Mass.,  213;  in  Mich.,  217;  in 
Mont.,  213 ;  in  Nevada,  213 ;  in  N. 
M.,  213;  in  N.  Y.,  212;  in  Ohio, 
213;  in  R.  I.,  217.  See  Valuation, 
Special  assessment. 

Athens,  23. 

Athletic  clubs,  11. 

Audit,  334-339.    See  Control. 


Banks,  347, 348.    See  Corporations. 

Base,  100. 

Bastable,  6,  10,  20  n.,  27, 46,  92,  93, 

96  n.,  182,  185,  240,  268,  296  n., 

330. 

Bede,  71,  126,  127. 
Beer,  English  tax  on,  176  n.    See 

Excises. 
Benefit   theory,   83,  111-113.    See 

Common    benefit    and    Special 

benefit. 

Benevolences,  71, 134, 136. 
Besitz,  93. 
Betterment,  66,  95, 267.  See  Special 

assessment. 
Bibliography,  354. 
Bluntschli,  2  n. 
Boeckh,  23  n. 
Bonds,    taxation    of,    224.      See 

Debts. 

Bounties,  59-61. 
British  income  tax,  239-242. 
Buckley,  348  n. 
Budget,  325-332.    See  Control  and 

Audit. 

Buildings,  public,  41,  42. 
Building  tax,  153,  222,  255. 
Burgess,  J.  W.,  18 "n.,  172  n. 

Cadastre,  103,  150,  217,  221.    See 

Land  tax. 

California,  164,  249. 
Cameralists,  4,  34. 
Canals,  46. 

Capitation,  129,  130.    See  Poll. 
Capitalisation  of  taxation,  167. 
Capital,  taxation  of,  222-226,  257. 
Carucage,  134. 
Census,  U.  S.,  35, 108,  210. 
Certainty  and  convenience,  346. 


377 


378 


INDEX 


Charitable  expenditure,  53, 54.    See 

Poor  relief. 
Charles  the  Bald,  123. 
China,  81. 
Church  fees,  204. 
City.     See  Municipality. 
Civic  housekeeping,  28. 
Civil  list,  33. 
Civil  war,  cost  of,  46;  income  tax, 

243. 
Classification,  10;  of  expenditure, 

27,  28 ;   of  debts,  298-301 ;   fees, 

83,  94 ;  of  revenues,  69 ;  of  taxes, 

83,  85,  86. 

Class  tax,  151.  See  Poll  tax. 
Conn,  6,  9n.,  10,  28,  99,  110,  172  n., 

191,  199  n.,  285,  294. 
Colbert,  129, 199. 
Collateral    inheritance    tax.      See 

Inheritance  tax. 
Collection,  37,  340-342. 
Colonial  policy  of  England,  202; 

taxation,  117,  139-142. 
Columbia  College  Studies,  117  n., 

140, 141,  265. 
Commerce,  51. 
Commissioner  of  general  land 

office,  335. 
Common  benefit,  11-13,  15,  28,  83. 

See  Benefit  theory. 
Common  penny,  126. 
Commonwealth  legislatures,  40. 
Commutation,  70. 
Comparative  method,  7. 
Compensatory  theory,  120. 
Comptroller,  335. 
Compulsion,  22. 
Compulsory  revenues,  76. 
Congress,  cost  of,  39 ;  finance  com- 
mittees, 330. 
Consolidated  fund,  349. 
Constitution  of  U.  S.,  241. 
Constitutionalism,  26,  71,  72. 
Consular  service,  36. 
Consumption,  8;    taxes,    93,    151, 

170. 

Contractual  revenues,  79,  80. 
Contributions,  voluntary,  71. 
Contribution  des  patents,  159. 


Control  and  Audit,  English,  333. 

Control  of  private  enterprise,  52; 
of  the  purse,  72. 

Convenience  of  tax-payer,  345. 

Conversion  of  debts,  314. 

Cooley,  Judge  T.  M.,  113. 

Corn  law,  160,  195. 

Corporation  taxes,  163,  216,  226. 

Corvees,  131. 

Cost  of  collection,  37.  [court. 

Courts,    64,    261.      See    Supreme 

Court  of  claims,  336. 

Crane  and  Moses,  2n. 

Credit,  281-288;  in  time  of  war, 
358-370.  See  Debts. 

Criminals,  56. 

Crown,  26,  34. 

Customs  duties,  103,  182  ff . ;  reve- 
nue from,  188 ;  fall  on  consumer, 
189;  fall  on  foreigner,  190;  fall 
on  importer,  190 ;  collection  of, 
341 ;  English,  134,  160,  193,  196 ; 
French,  199  ff . ;  German,  198 ;  in- 
cidence of,  253;  U.  S.,  201  ff. ; 
Virginia,  142.  See  Tariff.  i 

Customs  union,  197. 

Danegeld,  132. 

Death  duties,  162,  227.  See  Inheri- 
tance tax. 

Debts,  public,  classified,  298-301; 
conversion  of,  314;  payment  of, 
315 ;  economic  effect  of ,  290 ;  size 
of,  278,  279 ;  of  the  treasury,  306. 
See  Credit,  Indebtedness. 

Declaration,  238,  344. 

Deductive  method,  7. 

Defective  classes,  14. 

Defence,  43. 

Deficiency  bills,  333. 

Deficit  financiering,  21,  281.  See 
Debts. 

Definitions,  100 ;  of  public  finance, 
1. 

Democracy,  22. 

Derivative  revenues,  79. 

Die  me,  129,  131. 

Digressive  rate,  101,  102. 

Diplomatic  service,  36. 


INDEX 


379 


Direct  taxes,  87-89;  apportioned 
U.  S.,  364;  assessment  of,  342; 
consumption  taxes,  170 ;  French, 

158.  See  Classification. 
Distribution,  145.  [subject,  8. 
Division,  of  labour,  23,  24;  of  the 
Domains,  25,  26,  70,  96. 

Dona,  71. 

Donative  monies,  127. 

Door    and    window    tax,   French, 

159.  See  Window  tax. 
Douglas,  C.  H.  J.,  141. 
Droit  de  patent,  160. 
Duties,  103.    See  Customs. 

Economic  effect  of  public  borrow- 
ing, 290. 

Economics,  1-3. 

Economic  rent.    See  Single  tax. 

Education,  48-50. 

Educational  fees,  263. 

Eleventh  census,  U.  S.,  35, 108, 210. 

Elizabeth,  76. 

Ely,  R.  T.,  73. 

Embargo,  203. 

Eminent  domain,  82. 

English  writers,  5;  excises,  176  n. ; 
protective  duties,  194;  tax  sys- 
tem, 160.  See  British  Parlia- 
ment. 

Equalisation,  344. 

Erwerb,  93. 

Estimates,  328. 

Ethics,  8. 

Exchequer  bills,  307. 

Excises,  103,  169  ff .,  171,  172,  181 ; 
collection  of,  342 ;  etymology  of, 
129  n.;  German,  173;  incidence 
of,  253;  in  New  York,  142. 

Exemption,  112,  124. 

Expansion  of  State  functions,  19. 

Expediency,  12,  73. 

Expenditure,  5, 8 ;  classified,  27  ff. ; 
constitutionally  controlled,  26; 
evolution  of,  31 ;  early  stages  of, 
22;  feudal,  25;  forced,  20;  for 
individuals,  53;  limited  by  re- 
sources, 9;  net,  33.  See  Con- 
sumption, taxes  on. 


Export  duties,  183. 
Expropriation,  82. 
Extra-ordinary  expenses,  354. 
Extravagance,  35. 

Faculty  theory,  84,  115-120,  121, 
140;  tax,  116.  See  Ability. 

Family  tax,  90, 124.  See  Hearth  tax. 

Farmers  overtaxed  in  U.  S.,  255. 

Farming  of  taxes,  340. 

Federal  taxation,  146. 

Fees,  78,  94,  259 ff.;  administra- 
tive, 95,  263;  church,  264;  col- 
lection of,  262 ;  development  of, 
260;  educational,  263;  judicial 
and  legal,  94,  261;  postal,  269; 
for  services  to  private  indus- 
tries, 265.  See  Special  assess- 
ments. 

Feudal  dues,  commuted,  124;  a 
heavy  burden, 125;  French, 128; 
feudal  expenditure  and  revenues, 
25,  70 ;  taxation,  123, 124. 

Fifteenths  and  tenths,  135. 

Final  incidence,  104. 

Fines  and  penalties,  82. 

Fiscal  administration,  10,  326; 
year,  332. 

Five-twenties,  303. 

Floating  debts,  293-295. 

France,  43.    See  French. 

Freedom,  18. 

Freeman,  exempt,  124. 

Free  trade,  203  (see  Customs  and 
protection) ;  in  land,  116. 

French  customs  duties,  89;  direct 
taxes,  158;  feudal  dues,  128; 
revolution,  130 ;  tax  system,  157 ; 
tobacco  monopoly,  99,  100. 

Fumage,  132.    See  Hearth  tax. 

Functions  of  government,  6.  See 
State. 

Funded  debt,  293-295. 

Funds  of  account,  351. 

Gabelle,  132, 174. 
Galatin,  320. 
Gardner,  H.  B.,  353  n. 
Geffcken,  48. 


380 


INDEX 


General  property  tax,  208-219 ;  in- 
cidence, 254 ;  Prussian,  155,  210 ; 
Swiss,  210;  U.  S.,  163,211. 

George,  Henry,  106-108.  See  Sin- 
gle tax. 

Germany,  43, 173.    See  Prussian. 

Gifts,  82. 

Gobelin,  275. 

Goodnow,  65. 

Government,  functions  of,  132. 
See  State. 

Grand  list,  100. 

Greece,  expenditure  in,  22,  23. 

Hall,  Hubert,  193  n. 

Hamilton,  A.,  320. 

Hamilton,  R.,  318. 

Hearth  tax,  90,  124, 132. 

Henry  VIII.,  75. 

Heriot,  227. 

Hidage,  133. 

Hill,  J.  A.,  236. 

Historical  method,  7. 

Hoffman,  I.  G.,  2  n.,  11  n. 

Hospitals,  57. 

House  tax,  156,  161.    See  Building 

tax. 
Hussite  wars,  126. 

Idaho,  assessment  in,  213. 

Ideal  taxation,  110,  111. 

Import  taxes.    See  Customs. 

Imposts,  103, 141. 

Impot  fonder,  220 ;  unique,  106. 

Incidence,  104,  248  ff . ;  of  building 
tax,  255 ;  of  capital  tax,  257 ;  of 
customs  and  excises,  253 ;  of  gen- 
eral property  tax,  255;  of  land 
tax,  256;  of  personal  property 
tax,  255.  See  Shifting. 

Income  tax,  90,  91,  137;  theory  of 
and  place  in  system,  232-235; 
British,  91,  161,  239-242,  356; 
Prussian,  152,  236;  socialistic, 
107 ;  U.  S.,  89,  242-247,  364.  See 
Personal  taxes. 

Indebtedness.  See  Credit,  Debts, 
Public  Debts,  Loans. 

Independent  treasury,  348. 


Indigence,  54. 

Indirect  taxes,  87,  88,  147.  See 
Direct  taxes  and  Classification 
of  taxes. 

Individualism,  18. 

Induction,  7. 

Industrial  organisation,  6 ;  revolu- 
tion, 144. 

Industries,  public,  66,  271,  274. 

Industry,  public  aid  to,  51;  tax, 
153,  159. 

Inheritance  tax,  89,  227-230; 
American,  229;  English,  162. 
See  Death  duties  and  succession. 

Injunctions,  65. 

Insane,  56. 

Insurance,  56,  299.  See  Corpora- 
tions. 

Interest  on  public  debt,  305,  306. 

Internal  improvements,  47. 

Internal  peace,  46. 

Internal  revenue,  103, 177-179. 

Irredeemable  paper  money,  297. 
See  Credit. 

Issues,  349. 

Judicial  and  legal  fees,  94. 
Justice,  cost  of,  64. 
Justification  of  taxation,  73,  83. 

Kandtorowicz,  191. 

Keynes,  7  n. 

Kidd,  18  n. 

Kinley,  348  n.  '»  '  ' 

Knies,  282-286. 

•% 

Laissez-faire,  5. 

Land,  free  trade  in,  150;  public, 
271-273;  tax,  124,  219-222;  Eng- 
lish, 137;  incidence,  256;  Prus- 
sian, 150.  See  Real  estate,  Sin- 
gle tax. 

Law,  John,  286. 

Legacy  and  succession  duties,  228. 
See  Inheritance  tax  and  Death 
duties. 

Legal  fees,  94,  262. 

Legislature,  cost  of,  38,  41. 

Leroy-Beaulieu,  6  n.,  9  n.,  296  n. 


INDEX 


381 


Levasseur,  200  n. 

Levy,  J.  H.,  195  n. 

Lexis,  W.,  189. 

Libraries,  50. 

Licenses,  95.    See  Alcoholic. 

Life  insurance  premiums  exempt, 
242. 

Life-saving  stations,  48. 

Light-houses,  48. 

Limitation  of  State  functions,  21. 

Limited  option  debt,  303. 

List,  F.,  61. 

Loans,  domestic  and  foreign,  291; 
forced  and  contractual,  296 ;  pro- 
ductive, 307,  308.  See  Debts. 

Local  councils,  40;  debts,  292; 
taxes,  English,  137,  162;  Prus- 
sian, 156. 

Lottery  loans,  305. 

Luxuries,  excise  on,  174. 

Magna  charta,  135. 

Malchus,  11  n. 

Malthus,  54. 

Manufactures,  public,  31,  67,  97, 

98,  271,  276. 
Market  dues,  125. 
Marquardt,  24  n. 
Massachusetts,  213. 
Mayo-Smith,  201. 
McCulloch,  195  n. 
McKinley  tariff,  206. 
McLeod,  283,  286,  287. 
Measure  of  taxation,  75,  83. 
Meat  and  meal  tax,  156. 
Mercantile  theory,  129. 
Method,  7. 
Mexico,  109. 
Michigan,  217. 
Mileage,  41. 

Military  services  commuted,  71. 
Mill,  J.  S.,  185. 
Mines,  274. 

Minimum  of  subsistence,  84, 112. 
Miquel,  154. 
Moffett,  39. 
Monarchical  State,  25. 
Money  payments,  145. 
Monopoly  prices,  97. 


Montana,  213. 

Morrill  tariff,  204. 

Mortgage  tax,  164,  225,  241,  249. 

Moses,  B.,  2  n. 

Municipal  taxes,  128. 

Museums,  50. 

Napoleon  III.,  200. 

National  debt  services,  349. 

Navigation,  47 

Navy,  45. 

Nebenius,  282. 

Necker,  130. 

Negotiation  of  debt,  311,  312. 

Nevada,  213. 

New  England  land  system,  141; 
taxes,  140. 

New  Mexico,  213. 

New  York,  assessment  in,  212;  ex- 
cises, 142. 

Notary's  fee,  262. 

Objections  to  general  property  tax, 

209. 

Objective  taxes,  92. 
Octroi,  132,  157. 
Ohio,  assessment  in,  213,  217. 
Orders  in  council,  202. 
Organisation  of  the  State,  19. 

Paper  money,  297. 

Parliament,  cost  of,  40. 

Patriotic  loans,  296  n. 

Payment  of  debts,  315 ;  of  interest, 
313. 

Penalties,  82. 

Pennsylvania,  213. 

Pensions,  58. 

Percentage  taxes.  See  Propor- 
tioned taxes. 

Perpetual  bonds,  302. 

Personal  property  in  U.  8.,  211, 
217;  tax,  incidence  of,  255. 

Personal  tax,  90,  231  ff.;  and 
dwelling  tax,  French,  159 ;  Prus- 
sian, 151.  See  Poll  tax,  Class  tax, 
Income  tax. 

Pet  banks,  348. 

Petitiones,  71, 


382 


INDEX 


Physiocrats,  5,  87,  106. 

Pitt's  sinking  fund,  317. 

Police,  46. 

Political  equality,  146. 

Political  science,  2. 

Poll  tax,  90,  231;  French,  129; 
Prussian,  151 ;  shifting,  257 ; 
Virginia,  141.  See  Capitation. 

Poor  law,  English,  139. 

Poor  rate,  English,  75,  76,  138. 

Poor  relief,  23,  55. 

Popular  subscription,  311,  371-373. 

Possession  tax,  93. 

Postal  fees,  269 ;  surplus,  270. 

Poverty,  13,  54. 

Price,  B.,  317. 

Prices,  78,  96. 

Primary  taxes,  93. 

Printing,  public,  39,  40. 

Probate  fees,  95. 

Productive  agents  taxed,  145; 
loans,  307,  308.  . 

Progressive  rate,  101.  See  Income 
tax. 

Prohibition  of  exports  and  im- 
ports, 199. 

Property,  landed,  assessed  accord- 
ing to  annual  yield,  116 ;  and  in- 
come tax,  English,  161;  taxes, 
90,  91 ;  general,  208  ff. ;  not  gen- 
eral in  U.  S.,  164. 

Proportioned  rate,  101 ;  taxes,  94. 

Protection,  59,  60,  63, 184,  185,  187. 
See  Customs  duties,  Free  trade. 

Prussian  general  property  tax, 
210 ;  income  tax,  236-239 ;  tax  re- 
form, 149;  tax  system,  150-154. 
See  Germany. 

Public  credit,  14,  281,  288,  289.  See 
Credit,  Debts. 

Public  debts,  14;  forms,  293;  ne- 
gotiation, 311 ;  system  of,  309. 

Public  finance,  defined,  1;  a 
science,  1-3. 

Public  industries,  31,  97,  98,  271, 
276. 

Public  land,  271-273;  property,  26. 

Quarantine,  57. 


Qwasi-debt,  297. 
Quit-rents,  140. 

Rate,  100.    See  Poor  rate. 

Rau,  35  n.,  87,  282. 

Real  estate  in  U.  S..  211-217;  tax, 
French,  158. 

Real  taxes,  91. 

Redemption  of  debt,  315-323. 

Reform,  10,  165. 

Register,  335,  338. 

Regressive  rate,  102. 

Relief,  227. 

Religion,  15,  22. 

Rent  charges,  124.    See  Single  tax. 

Representative  government,  72. 

Repressive  effect  of  taxation,  109. 

Reserves,  cash,  281. 

Revenue  taxes,  93 ;  duties,  184, 185. 
See  Internal  revenue. 

Revenues,  classification  of,  69 ;  col- 
lection of,  340  ff . ;  cost  of,  37 ; 
derivative,  79. 

Reversions,  82. 

Revolution,  French,  130;  indus- 
trial, 144. 

Rhode  Island,  217. 

Ricardo,  112. 

Ripley,  140. 

Rivers  and  harbours,  47. 

Roads,  46. 

Roman  army,  24 ;  expenditure,  22- 
24 ;  law,  123 ;  taxes,  125. 

Roscher,  4  n.,  21  n,,  296  n. 

Rosewater,  265. 

Ross,  251  n.,  319. 

Sacrifice  theory,  84. 

Salable  value  of  real  estate,  116. 

Saladin  tithe,  134. 

Salt  tax,  179.    See  Gabelle. 

School  fees,  263. 

Schwab,  142  n. 

Scutage,  133. 

Secondary  taxes,  93. 

Seligman,  E.  R.  A.,  11,  76,  76  n.,  78, 
84,  92,  95,  96  n.,  121,  172  n.,  201, 
217-219,  247,  252,  253,  266. 

Services,  349. 


INDEX 


383 


Sevres,  275. 

Sewage,  15. 

Shaw,  49  n. 

Sherwood,  283  n. 

Shifting,  104,  248  ff . ;  cost  of,  250 ; 
of  customs  and  excises,  253 ;  poll 
tax,  257.  See  Incidence. 

Shipgeld,  132. 

Single  tax,  106-109.  See  George, 
Henry,  Income  tax,  socialistic. 

Sinking  fund,  316-323 ;  of  common- 
wealths, 323;  Galatin's,  320;  of 
war  debt,  322.  See  Redemption 
of  debt. 

Smith,  Adam,  5,  46;  classification 
of  taxes,  92 ;  canons  of  taxation, 
250,  251;  funded  and  floating 
debts,  293,  294 ;  on  proportional 
taxation,  111. 

Smuggling,  192. 

Socialism,  18.    [of progression,  120. 

Socialistic  income  tax,  107 ;  theory 

Spahr,  107  n.,  108. 

Spain,  war  with  U.  S.,  360. 

Special  assessments,  95,  265-269. 

Special  benefit,  11-13,  28. 

Specific  duties,  191. 

Springer  v.  U.  S.,  244,  245. 

Stamps  for  fees,  262. 

State,  functions  of,  17,  19 ;  nature 
of,  17 ;  an  organism,  17 ;  owner- 
ship of  railroads,  3.  See  Govern- 
ment. 

Steadiness  of  revenues,  20. 

Stein,  L.  v.,  81  n. ;  on  customs  du- 
ties, 193;  on  budget,  325. 

Steuer,  71. 

Stoppage  at  source,  228. 

Storage  of  funds,  347. 

Stourm,  325. 

Sub-treasuries,  347. 

Subjective  taxes,  92. 

Succession  tax,  227.  See  Inheri- 
tance tax,  Death  duties. 

Sumner,  201  n. 

Superannuations,  59. 

Supply  services,  English,  350. 

Supreme  court,  89 ;  on  income  tax, 
244,  245. 


Surplus,  21. 

Switzerland,  general  property  tax, 

210. 
System  of  taxation,  105. 

Tattle,  etymology  of,  129  n.,  130. 

Tallage,  129, 129  n.,  133 ;  of  groats, 
135. 

Tariff,  182  ff . ;  English,  193; 
French,  199,  201 ;  German,  197 ; 
U.  S.,  201  ff.  See  Customs  duties. 

Taussig,  201  n. 

Taxation  by  divided  authorities, 
148;  English  writers  on,  5;  evo- 
lution of,  125;  by  faculty,  115- 
120;  ideal,  110,  111 ;  justification 
of,  83 ;  measure  of,  75,  83.  See 
particular  captions. 

Taxes,  acquisition,  93;  appor- 
tioned, 94;  besitz,  93;  classified, 
85, 86 ;  consumption,  93 ;  defined, 
77 ;  direct  and  indirect,  Rau  and 
Wagner,  87 ;  early  English,  132 ; 
erwerb,  93 ;  income,  90,  91 ;  per- 
sons, 90;  possession,  93;  prop- 
erty, 90,  91;  proportioned,  94; 
on  revenue,  93;  on  verbrauch, 
93.  See  particular  captions. 

Tax  farmer,  340 ;  list,  103;  system, 
105,  110. 

Technical  education,  49. 

Ten-forties,  303. 

Terminable  annuities,  304. 

Thirteenths  and  fifteenths,  134. 

Tithes,  French,  129. 

Tobacco  monopoly,  3, 151, 179, 180. 

Tobacco  tax,  175, 177  n.,  178. 

Toll,  103. 

Training  schools,  45. 

Transfer  of  funds,  346. 

Transit  duties,  182. 

Treasury,  notes,  307 ;  department, 
335,  338. 

Turkish  wars,  126. 

Twentieths,  129. 

Unearned  increment,  98, 109. 
Unit  of  base,  100. 
Universities,  50,  263. 


384 


INDEX 


Valuation  of    property   in  U.  S., 

211. 

Verbrauch,  93. 

Vereinfiir  Socialpolitik,  202. 
Vermont,  100,  117,  217. 
Vignes,  129  n. 
Vingtieme,  129,  130. 
Virginia,  141,  142,  247, 
Voluntary  contributions,  71. 

Wages  taxes,  207. 

Wagner,  A.,  20  n.,  87,  88  n.,  126, 

128,  157,  236  n.,  294,  295. 
Walker,  F.,  141. 
War,  borrowings   of    U.   S.,  369; 

expenditure  for,  22, 23, 45, 354  ff . ; 


finances  of,  354-374;  revenue 
bill,  U.  S.,  366 ;  tariff  of  U.  S.,  204, 
361,  362;  taxes,  U.  S.,  357,  358, 
363-365. 

Water  supply,  15,  97. 

Weather  bureau,  48. 

West,  Max,  227. 

Wilson,  A.  J.,  46,  195  n.,  240,  329. 

Wilson  tariff,  206. 

Wilson,  Woodrow,  2n. 

Window  tax,  English,  161. 

Wood,  F.  A.,  117  n.,  140. 

Woolsey,  43. 

Wyoming,  213. 

Zollverein,  197. 


New  Books  on  Economics,  Political  Science, 
and  Sociology 


DRAHMS.    The  Criminal,  His  Personnel  and  Environment.    A 

Scientific  Study.      By  the  Reverend  AUGUST  DRAHMS.     With  an 
Introduction  by  Cesare  Lombroso.        Cloth.     I2mo.     Price  $2.00 

BLACKMAN.  The  Making  of  Hawaii.  A  Study  in  Social  Evolu- 
tion. By  WILLIAM  F.  BLACKMAN.  Price  $2.00 

DAVENPORT.  Outlines  of  Economic  Theory.  By  HERBERT 
JOSEPH  DAVENPORT.  Cloth.  8vo.  Price  $2.00 

Outlines  of  Elementary  Economics.    By  the  same  author. 

Cloth.     i2mo.     Price  80  cents 

DEVINE.    Economics.     By  EDWARD  THOMAS  DEVINE. 

Cloth.     I2mo.     Price  $1.00  net 

EATON.  The  Government  of  Municipalities.  By  DORMAN  B. 
EATON.  Columbia  University  Press.  Price  $4.00  net 

GIDDINGS.  The  Principles  of  Sociology.  By  FRANKLIN  HENRY 
GlDDlNGS.  Columbia  University  Press. 

Cloth.    8vo.    Price  $3.00  net 
The  Theory  of  Socialization.    By  the  same  author. 

Paper.    8vo.     Price  60  cents 

Democracy  and  Empire:  with  Studies  of  their  Psychological, 
Economic,  and  Moral  Foundations.    By  the  same  author. 

Cloth.     8vo.     Price  $2.50 

GOODNOW.  Municipal  Home  Rule.  A  Study  in  Administration. 
By  FRANK  J.  GOODNOW.  Cloth.  I2mo.  Price  #1.50 

Municipal  Problems.     By  the  same  author. 

Cloth.     I2mo.     Price  $1.50 

MAYO-SMITH.  Science  of  Statistics.  By  RICHMOND  MAYO- 
SMITH.  Two  Volumes.  Goth.  8vo. 

Vol.   I.     Statistics  and  Sociology.  Price  $3.00  net 

Vol.  II.    Statistics  and  Economics.  Price  $3.00  net 

PATTEN.  The  Development  of  English  Thought.  A  Study  in 
the  Economic  Interpretation  of  History.  By  SIMON  N.  PATTEN. 

Cloth.     8vo.     Price  $3.00 

SELIGMAN.  The  Shifting  and  Incidence  of  Taxation.  By 
EDWARD  R.  A.  SELIGMAN.  Second  edition,  completely  revised 
and  enlarged.  Cloth.  8vo.  Price  $3.00  net 

VEBLEN.  The  Theory  of  the  Leisure  Class.  By  THORSTEIN 
VEBLEN.  Crown.  8vo.  Price  $2.00 

WARD.    Outlines  of  Sociology.    By  LESTER  F.  WARD. 

Cloth.     I2mo.     Price  $2.00 


THE   MACMILLAN   COMPANY 

66  FIFTH  AVENUE,  NEW  YORK 


The  Citizen's  Library  of  Economics,  Politics, 
and   Sociology 

Half  Leather.      $1.25  each 


MONOPOLIES   AND  TRUSTS 
By  RICHARD    T.    ELY,    Ph.D.,    LL.D. 

Since  such  prominence  has  been  given  the  subject  of  Trusts  in  the 
public  press,  it  may  seem  that  the  present  interest  in  the  topic  has  sug- 
gested this  book;  but,  on  the  contrary,  the  author  has  been  engaged  on 
this  and  connected  subjects  for  a  number  of  years ;  it  is  the  result  of 
long-continued  research,  a  complete  and  searching  discussion,  interest- 
ing and  authoritative. 

"  It  is  admirable.  It  is  the  soundest  contribution  on  the  subject  that  has 
appeared."  —  Professor  JOHN  R.  COMMONS. 

"  By  all  odds  the  best  written  of  Professor  Ely's  works." 

—  Professor  SIMON  N.  PATTEN,  University  of  Pennsylvania. 

THE  ECONOMICS   OF  DISTRIBUTION 
By  JOHN  A.  HOBSON 

Author  of  "The  Evolution  of  Modern  Capitalism"  etc. 

An  analysis  of  those  processes  of  bargaining  through  which 
economic  distribution  is  conducted,  the  results  of  industrial  co-opera- 
tion being  apportioned  to  the  owners  of  the  factors  of  production  in 
its  several  stages. 

IN  PREPARATION 

ESSAYS  IN  THE  MONETARY  HISTORY  OF  THE 

UNITED  STATES 
By  CHARLES   J.   BULLOCK,  Ph.D. 

Assistant  Professor  of  Political  Economy,  Williams  College 

The  first  of  these  three  essays  furnishes  the  first  systematic  attempt 
to  supply  an  interpretation  of  the  leading  facts  in  the  entire  monetary 
history  of  the  country,  maintaining  the  thesis  that  during  three  cen- 
turies the  agitation  for  cheap  money  has  been  due  to  the  same  under- 
lying cause,  namely  the  extension  of  settlements  over  unoccupied 
Western  lands,  and  that  consequently  by  a  process  of  natural  evolution 
we  are  now  approaching  its  end;  the  two  others  are  briefer  and  contain 
the  results  of  original  investigations  into  special  topics  —  the  early 
paper  currency  of  the  States  of  North  Carolina  and  New  Hampshire. 

OTHERS   TO  FOLLOW 


THE   MACMILLAN   COMPANY 

66  FIFTH  AVENUE,  NEW  YORK 


OF  CAH 


THIS  BOOK  IS  DUE  ON  THE  LAST  DA 
STAMPED  BELOW 


,TE 


AN     INITIAL     FINE     OF    25     CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $I.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


1  1933 

2  1934 


LD  21-50m-l,'3: 


